Credit Suisse has said it expects the proposed £3.7bn merger between supermarket giant Tesco PLC (LON:TSCO) and food wholesaler Booker Group PLC (LON:BOK) to be approved by competition regulators.
The competition and markets authority (CMA) is due to report its preliminary decision on the deal within the next six weeks or so after referring it to an in-depth phase II investigation back in July.
READ: Tesco-Booker deal to undergo in-depth CMA investigation
At the time, the CMA said there were concerns over competition since there are 350 areas where there is an overlap between Tesco shops and Booker’s independent stores (Premier, Budgens and Londis).
Another worry was that Booker could offer inferior wholesale terms to the stores it currently supplies in order to drive customers to Tesco.
Analysts at Credit Suisse have dismissed those fears though, and they expect the merger to be given the “tentative green light” with only “minor (if any) remedies” to be required. They now reckon there is a 95% chance that the deal will get the go-ahead from regulators.
Stewart McGuire and co said they “like this transaction” although they added that it doesn’t come without its challenges.
“[The deal] is large enough to matter and would provide a credible path for Tesco to work through its key problems,” wrote McGuire on Monday.
“However, integrating two expansive, complex operations while reorganising a large part of its store estate is more challenging than the issues faced in other acquisitions (such as Sainsbury's recent takeover of Argos).”
Price target upgraded
McGuire argues that Tesco could integrate Booker stores into its larger shops, which would potentially reduce Tesco’s lease costs.
“We have increased the potential Booker synergies to include a portion of lease cost savings estimate as well as Tesco/Booker's estimate of revenue synergies – both risked at 55% (up from 50%).
“Our target price rises to 165p from 160p based on the increase in value of estimated synergies to Tesco shareholders (from £785m to £1.2bn).”
The analyst is still fairly bearish on the stock though and reiterated his ‘underperform’ rating
Tesco shares were 0.3%, or 0.55p, lower in mid-morning trade on Monday at 184.95p.