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Tesco - Merger with Booker Group and a resumption of dividends

George Salmon | 27 January 2017 | A A A
Tesco - Merger with Booker Group and a resumption of dividends

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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 financial year 2017/18. The shares rose 7.6% on the news.

Our View

Tesco's announcement that it will be purchasing Booker had another significant piece of news in it. The group's recent improved performance, coupled with a more confident outlook for the near future, means the Tesco board has given the green light to resume dividend payments in 2017/18.

While it is not clear what the first payment will be, the longer-term plan to build the dividend up to around half of earnings is clearly good news for shareholders.

The purchase of Booker, which is subject to shareholder and CMA approval, has taken the market a touch by surprise. Booker is the UK's largest cash and carry business, serving over half a million wholesale customers ranging from independent grocers to pubs and restaurants.

Coming after Sainsbury's purchase of Argos, the deal is symptomatic of a wider trend among the supermarkets to diversify away from their core food businesses. The acquisition takes the group in a new direction, and that comes with risks, but, there are also some easy wins, with synergies in distribution and corporate costs.

Recently, one of the major concerns about Tesco has been the debt hanging over the group. In that light, a £3.7bn acquisition may raise an eyebrow or two. However, the merger doesn't stretch the balance sheet much. The majority of the deal is being financed by the issuance of new shares, with the cash cost just £770m. Bringing Booker into the fold should ease, rather than create, financial worries. It is loaded up with over £100m of net cash, and also brings decent free cash flows.

Merger Details:

The deal would mean that each Booker shareholder receives 42.6p in cash and 0.861 new Tesco shares per Booker share.

Based on the closing price on 26 January 2017, the deal values Booker at £3.7bn, which represents a premium of approximately 12% to the value of each Booker share.

Tesco expects pre-tax synergies to reach at least £200 million per annum within three years of the merger's completion.

Dave Lewis, Tesco Chief Executive said the combined expertise in retail, wholesale, supply chain and digital will add to Tesco's growth prospects. He added "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."

Q3 and Christmas Trading Update (12 January 2017):

Like-for-like UK sales growth of 1.8% saw Tesco gain market share in the third quarter, the first time it has done so since 2011 and the group's eighth consecutive quarter of like-for-like volume growth.

However, sales growth slowed over the six week Christmas period, with UK LFL sales up 0.7%. That was partly due to the decision not to repeat the Clubcard 'Boost' promotion, which reduced general merchandise sales by 0.8%. However, food-like-for-like sales rose 1.3%, with "significant market outperformance in fresh food"". This includes increased sales in party food and Free From products, up 24% and 18% respectively, while clothing and toys also delivered strong performances, up 4.3% and 8.5%.

Operationally, Tesco saw on time deliveries to large stores improve to 98.9%, helping the group reduce stock levels by over £50m year-on-year, while improving availability over the peak Christmas period by 1%.

FThe 0.1% fall in international LFL sales came as the group lapped strong performance in both Asia and Europe last year. Market share grew in Thailand, despite weaker consumer spending, Hungary and Slovakia, offsetting the impact of intense competitive activity in Poland.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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