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Tesco – a bold new direction

The boards of Tesco and Booker Group have announced that they have reached an agreement for a merger to create the UK’s largest foods business. Tesco has also announced the resumption of dividend payments in the financial year 2017/18.

The shares rose 7.6% on the news.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

"The deal with Booker shows Tesco is not going to sit on its hands and wait for its dominant market position to slowly leak away to competitors.

The UK’s supermarkets are engaged in new strategies to cope with the brave new world, where the discounters have stolen market share and consumers have turned away from big superstores, preferring instead to do their shopping in convenience stores or on their mobile phones. Sainsbury bought Argos, Morrisons is flirting with Amazon, and now Tesco has revealed its plans to drive further growth.

The announced resumption of dividends will be music to the ears of Tesco shareholders, though it’s likely to build up from a small base initially.

Much of the problem at Tesco in recent times has been the debt pile hanging over the group, so a £3.7 billion acquisition might on the face of it look like spitting in the wind. However, the majority of the deal is being financed by the issuance of new shares, with the cash cost at just £770m, and Booker’s balance sheet is loaded up with over £100 million of net cash.

The deal will inevitably lead to questions over the hegemony of Tesco’s presence in the high street, seeing as the deal means it will control Londis, Budgens and Premier brands, though these are effectively badges which are franchised to independent retailers, so the competition authority may not raise an eyebrow.

The widening of Tesco’s distribution should also give it even greater bargaining power with its suppliers, who may be thinking about raising prices because of the weaker pound. In theory this should mean keener prices for customers, though the fall in sterling has been so dramatic that supermarket prices may yet rise, despite the competitive environment."