Tesco plc’s (LON:TSCO) proposed £3.7bn takeover of wholesaler Booker Group plc (LON:BOK) will undergo an in-depth investigation by the competition watchdog.
The UK Competition and Markets Authority said there were concerns the planned tie-up would reduce competition since there are 350 areas where there is an overlap between Tesco shops and Booker’s independent stores - Premier, Budgens and Londis.
The other worry is that Booker could offer inferior wholesale terms to the stores it currently supplies in order to drive customers to Tesco, the CMA said. Booker is the UK’s largest wholesaler.
The in-depth inquiry by the CMA follows an initial investigation into the deal after Tesco and Booker last month asked the watchdog to fast-track its probe to the next stage.
During the first phase of the investigation, CMA said other competition concerns had been raised and considered but were not examined properly since it was now moving onto the second phase.
The final review is expected to be published before Christmas since the statutory timetable for the investigation is 24 weeks.
UBS weighs in on CMA's probe of Tesco-Booker tie-up
UBS said it hosted an investor call in April with Aidan Robertson QC, a specialist in competition law, who said the main concern for the CMA was that the merger could put Tesco in a position to distort market pricing through Booker.
However, Robertson had noted the CMA found when Booker acquired Irish grocery retail and wholesaler, Musgrave Retail Partners, in 2015 there were no so-called 'substantial lessening of competition' (SLC) concerns around local pricing. This was because Booker does not own the stores it sells items to and any attempt to exploit store owners would likely result in switching to other wholesalers.
"Tesco's ability to leverage purchasing scale over suppliers was seen by Aidan as an issue of 'efficiency' rather than competition, and so unlikely to result in a SLC concern," UBS said.
"Similarly, the prospect of Tesco consolidating its position (albeit indirectly through symbol groups) on the high street was seen as a legitimate competitive outcome as the underlying driver would presumably be lower prices and/or improved service/offer."
READ:Tesco asks competition regulators to speed up investigation into its £3.7bn Booker acquisition
Tesco receives opposition from major shareholder over proposed Booker deal
Tesco and Booker said they saw the deal being completed in late 2017 or early 2018 at the time it was announced earlier this year.
Tesco, the UK’s largest supermarket, has received opposition from some investors over the planned acquisition.
Schroders, one of Tesco’s biggest shareholders, has said it believes the supermarket was paying a premium for the deal and had concerns that it may derail its turnaround plans.