Shares in Tesco jumped 10% on Friday as firm announced £3.7bn merger
Companies: Booker Group, Tesco
Shares in Tesco and Booker Group shot up more than 10% and 15% respectively on Friday after the companies announced that they have agreed to terms for a shares and cash merger to create the UK's largest food business.
Tesco, the UK's largest food retailer, and Booker, the UK's largest food wholesaler, have agreed the terms of a £3.7bn deal, that will deliver "significant" value to shareholders:
"The Combined Group will bring benefits for consumers, independent retailers, caterers, small businesses, suppliers...
... [it] will be well placed to serve the large, established 'in home' food market as well as the faster growing 'out of home' food market...
bringing together... retail and wholesale expertise, supply chain and digital capabilities."
Tesco says the merger is expected to improve the availability of quality food at better prices for consumers at retail and eating out locations. It will enable the new group to provide a greater market opportunity for suppliers, with strong growth prospects and the opportunity to develop better own brand and fresh ranges.
Tesco is paying a c.15% premium to Booker's close on Thursday, and it will structure the deal with c.£750m in cash and the balance with paper (i.e. shares). That appears a pretty decent price for investors, whilst sharing the upside with Booker shareholders who will end up with 16% of the combined group.
The firms have identified at least £200m in annual pre-tax synergies between Tesco and Booker, after the third year. In effect, Tesco is paying roughly 18x the pre-tax synergies if they’re getting Booker for £3.7bn, which seems like a decent price. If Tesco and Booker find more synergies, which they say they have (without quantifying them), then that multiple improves.
Commenting on the announcement, Tesco CEO Dave Lewis said Tesco had made "significant" progress turning around the UK retail business, and that the merger would enhance Tesco's growth prospects in the UK by creating the UK's largest food business:
"...with combined expertise in retail, wholesale, supply chain and digital. Wherever food is prepared and eaten - 'in home' or 'out of home' - we will meet this opportunity with the widest choice and best service available."
CEO of Booker Charles Wilson said:
"Booker is committed to improving choice, prices and service for the independent retailers, caterers and small businesses that we are proud to serve. We believe that joining forces with Tesco offers the potential to bring major benefits to end consumers, our customers, suppliers, colleagues and shareholders."
Judging by share price moves on Friday morning, the market clearly believes the deal offers value for both brands, with Tesco shares up 10% and Booker shares up 15%. That's £500m for booker and c.£1.6bn for TSCO, hence the market has added c.£2.1bn in value to the combined entity.