Tesco PLC’s (LON:TSCO) £3.7bn takeover bid for food wholesale operator Booker Group PLC (LON:BOK) has been given final clearance by the UK competition watchdog.
The Competition and Markets Authority had provisionally cleared the deal in November but has now given unconditional clearance for the merger after concluding that the market would remain competitive.
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“We have carefully listened to feedback from retailers and wholesalers who operate in what are highly competitive UK retail and wholesale sectors,” said Simon Politco, chair of the CMA’s inquiry group.
“Retailers have told us that they shop around for the best prices and service from their wholesaler, and we are confident that this will continue after Tesco buys Booker.”
Competition concerns
The CMA had investigated the impact of combining Booker’s shops, such as Premier, Londis and Budgens, that compete with Tesco.
The regulator looked into whether the proposed merger could result in higher prices for shoppers or reduce service quality, given Tesco’s influence in the retail sector.
It also surveyed hundreds of retailers, which showed that most shops use more than one wholesaler and frequently switch.
Tesco said in a statement that it “welcomes the announcement from the CMA” and expects to publish a shareholder circular and prospectus in the second week of February, subject to approval of the UK Listing Authority.
“We anticipate respective shareholder meetings towards the end of February 2018, and completion in March 2018.”
Deal a 'win-win' for Tesco and Booker
Neil Wilson, senior market analyst at ETX Capital, said the deal is a "win-win" for Tesco and Booker with estimated cost synergies of £200mln a year, mainly through buying and distribution.
However, Wilson added that Tesco paid a 24% premium for Booker and the big risk is that the supermarket giant takes its eyes off its turnaround strategy - a concern raised by Tesco shareholders Schroders and Artisan Partners.
On the implications for the rest of the industry, Wilson said: “Given how easily this deal was approved, it leaves the door open for further significant consolidation in the sector and the potential for a major change in the UK retail space over the coming years.
“The case for consolidation is strong given the intense competition, heightened margin pressure and the emergence of new threats online. Retailers should be looking to strike now to secure their economies of scale.”