Key a concurrence on the terms of a prescribed

Key Points

Tesco acquires Booker Group for GBP 3.7bn, signalling the collapse of another leading wholesaler.
Completion of the deal would make Tesco the national leader in the food sector, both in terms of revenue and market share.
Following a five-month examination, the Competition and Markets Authority (CMA) found that consolidating Britain’s greatest basic need retailer and the main distributer would not prompt higher costs or weaker assistance. 
The merger will create an entity with a joined yearly revenue of nearly £60 billion, providing food to a huge number of customers and in addition a great many retailers, eateries, schools and cooking organisations.

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Introduction
On 27 January 2017, Tesco PLC (“Tesco”), and Booker Group PLC (“Booker”) declared that they have achieved a concurrence on the terms of a prescribed offer to merger hereby creating UK’s leading food business. The Combined Group could potentially benefit purchasers, autonomous retailers, food providers, private ventures, providers, and partners, and additionally provide a noteworthy monetary value to investors. The Combined Group will be set to serve the vast, built up ‘in home’ sustenance market and the rapidly developing ‘out of home’ wholesale showcase.

Background
Booker Group plc is the United Kingdom’s largest food wholesale operator, offering branded and private-label goods to over 400,000 customers, including independent convenience stores, grocers, pubs, and restaurants. The firm is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index. Notwithstanding losing piece of the overall industry as of late, Tesco remains the UK’s greatest grocery store with an market share of around 28%. The retail business is experiencing a time of fortification. 
Booker’s Londis, Budgens and Premier brands are based on a franchise foundation. This suggests the shops are controlled by privately owned business people, who pay Booker for the marketing, access to specific items and arrangements, and additionally tech support. Being a part of a purchasing group minimises expenses for these autonomous retailers. Booker additionally has an expansive sustenance benefit arm, which supplies high-road chains, for example, Wagamama and also bars, food providers and Rick Stein’s eateries. 
It generates approximately 20% of its £5bn yearly revenue via its online service, which includes silver screens and M&S among others.

Drivers of the Deal
The arrangement implies Tesco can extend much more rapidly in the accessibility market, which has been the quickest developing area in the grocery category for various years now. The tie-up with Booker would add 5,400 stores to Tesco’s current system of 2,900 little shops, which work under the Tesco Express, Metro and One Stop brands. Purchasing Booker likewise gives it a course into the food service business, another zone for Tesco, yet one that records for approximately 33% of Booker’s deals. It trusts this arrangement will enable it to spare £200m a year and lift yearly benefits by £25m following three years.

Tesco claims the merger is a win-win for everybody: it trusts it will give its providers more clients to pitch to, while giving autonomous retailers more variety. It likewise supposes it can eliminate sustenance squander by influencing the supply to tie from ranch to retailer more productive. Autonomous retailers-who have endured because of Tesco’s huge development throughout the last 3 decades or so-may still take some convincing.

This merger is arguably the most impactful story in the industry this decade. This remark, from one of Booker retailers, is the general sentiment from the retailers: “Every promise he has ever made us, he has delivered on, and he has turned Booker around. I think we should give it a chance.” The retailers believe in Charles Wilson, and most importantly put their stock in him. 

Those in attendance at a wholesale dinner communicated their admiration for the enviable position in which Wilson gets himself, as reported by the BBC. Not to liken the Tesco-Booker merger with lemmings hopping off a precipice, however the if Wilson somehow managed to instruct his retail clients to jump over the edge, the sentiment is that there would be more than a couple of Premier or Family Shopper retailers on the 7.20am to Dover the next day.

There are explanations behind this trust. Wilson has so far put his money where his mouth his. Wilson has made various promises regarding retailers about the arrangement: they will have better costs; they will be under no strain to acquiesce a Tesco-centred click & collect service, and various monetary benefits through Tesco’s banking arm. Wilson’s history implies retailers know they can depend on his guarantees. The second reason eliminates any discount manager covering up away in the workplace sending a notice: the Booker board has conveyed to clients as much as it can, and as frequently as possible. Wilson was on a phone call with retailers on the day the news broke and has made himself promptly accessible to the trade press since. 

Wilson, Booker’s overseeing executive for retail Steve Fox, and the directors of the Premier, Family Shopper, Londis and Budgens have all made themselves accessible at various times as part of a national roadshow permitting store proprietors to put any critical inquiries to them instantly. Questions still stay about the effect of the merger on singular store proprietors. In what manner will they contend with Tesco Express stores that adopt a similar inventory network, for instance? However, by being so noticeable and accessible, Booker’s administration have displayed their faith in this agreement and that they have nothing to cover up.

Challenges to the Deal
The Competition and Markets Authority cleared the money and-offers bargain, having  captured the industry unsuspecting it after temporarily authorising the acquisition. Following a five-month examination, the controller found that consolidating Britain’s greatest grocery supply retailer and the leading wholesaler would not prompt higher costs or weaker assistance. The deal will make an entity with joined yearly offerings of nearly £60 billion, providing products to a great many customers and in addition a large number of retailers, eateries, schools and catering firms. The expert’s underlying discoveries came days before Palmer and Harvey, a major provider of cigarettes, desserts and food with a revenue of more than £4 billion, drooped into control of its organisation in the wake of neglecting to plug a £65 million money gap. 

The decision had caused shock among wholesalers. Seven of Booker’s adversaries, including Spar and Bestway, conveyed to the advisory board in September approaching it to put a stop to the acquisition. John Mills, managing director of Landmark Wholesale, has cautioned that this deal would obliterate rivalry and put a large number of jobs in danger. He further stated that Palmer and Harvey did not fall in light of the approaching Tesco-Booker bargain yet it was an “indication of what is happening in our market and how thin edges are”. 

Steve Parfett, chairman of AG Parfett, scrawled to politicians, including Greg Clark, the business secretary, raising concerns. He said yesterday that the CMA had “totally misjudged” the evidence against the takeover. Mr Parfett added that he was conversing with partners in the business about the possibility of an objection. The regulator presumed that Tesco and Booker “do not compete head-to-head in most of their activities” and the shops that Booker supplies are “allowed to set their costs and choose which items to stock”. 

A few experts were shocked the guard dog seemed prepared to wave through such a huge and influential arrangement without requesting concessions when in 2015 it fretted about Poundland’s £55m takeover of the 99p Stores chain. In a gathering, representing 60% of the wholesale market, wholesalers mutually conveyed to the CMA expressing the arrangement would hand Tesco “incontestable control over the obtainment of all grocery categories in the UK”. “The wholesale trade will ask why for heaven’s sake it at any point tried drawing in at all with the CMA,” said one Shore Capital expert. “On the chance that Tesco and Booker can converge with unequivocal endorsement, at that point the degree for any further expansive acquisitions can’t be precluded. 

The move has instilled dismay leaving adversary wholesalers confounded as to the future of their autonomous general stores. John Mills, managing director of Landmark Wholesale, said: “As a result of this decision Tesco, who currently account for £1 in every £8 on the high street, will dominate the convenience and corner shop market and will undoubtedly now dominate the food service and out-of-home market as well.

The adversaries and wholesale retailers estimate that this acquisition will lead to enormous jobs vanishing from autonomous family-run stores which will inturn lead to a decreased selection for buyers and groups, a point that the CMA perhaps should’ve given more weight to.

The CMA, adversely, claimed the acquisition could further push adversaries in the wholesale market and lower prices for customers since Tesco and Booker were not direct competitors in many of their products.
In its report yesterday, the regulator said that it had considered “what this has meant for our inquiry and for competition at the wholesale level.”

“We have found that for each of the customer groups previously served by P&H — major multiple retailers, symbol group retailers, multisite retailers, and other retailers including independent retailers — as well as tobacco suppliers, sufficient options and competitive constraints will remain after the merger.”

More than 30% of its sales are to the catering sector, which Tesco does not supply, although the supermarket is keen to get a foothold in the market.
The CMA concluded that the wholesale market would “remain competitive in the longer term”, because Booker’s share of the UK grocery wholesaling market, at less than 20%, “was not sufficient to justify the longer-term concerns”.

Deal Structure
Under the terms of the Merger, each Booker Scheme Shareholder will receive: for each Booker Scheme Share: 0.861 New Tesco Shares; and 42.6 pence in cash. Based on the Closing Price of 189.0 pence per Tesco Share on 26 January 2017 (being the last Business Day before the date of this Announcement), the terms of the Merger represent: a value of approximately 205.3 pence per Booker Share;  a value of approximately £3.7 billion for Booker’s ordinary share capital; and   a premium of approximately 12 per cent. to the Closing Price of 183.1 pence per Booker Share on 26 January 2017, being the last Business Day prior to this Announcement.

The Merger represents a premium of approximately 15 per cent. based on the volume weighted average share prices of Booker and Tesco since 12 January 2017, being the date on which Booker and Tesco published their Christmas trading updates; and a premium of approximately 24 per cent. based on the three month volume weighted average share prices of Booker and Tesco. The Merger will result in Booker Shareholders owning approximately 16 per cent. of the Combined Group (based on the existing issued ordinary share capital of Tesco and Booker) and sharing in the benefits accruing to the Combined Group via attractive growth prospects and the realisation of significant revenue and cost synergies.

 On completion of the Merger, Charles Wilson, Booker’s Chief Executive Officer and Stewart Gilliland, Booker’s Chairman, will join the Combined Group’s Board. Charles Wilson will also join the Combined Group’s Executive Committee.

Tesco will provide a Mix and Match Facility, which will allow Booker Shareholders to elect, subject to off-setting elections made by other Booker Shareholders, to vary the proportion in which they receive New Tesco Shares and cash. The Mix and Match Facility will not change the total number of New Tesco Shares to be issued or the maximum amount of cash that will be paid under the terms of the Merger.

In connection with the Mix and Match Facility, Charles Wilson, the Chief Executive Officer of Booker has irrevocably undertaken to elect to receive 100 per cent. New Tesco Shares in respect of his entire holding of Booker Shares, subject to the elections of other Booker Shareholders.

Charles Wilson has also entered into the Lock?up Agreement pursuant to which he has agreed not to (subject to certain customary carve-outs) dispose of his current holding of 24,533 Tesco Shares and the New Tesco Shares he will receive pursuant to the Merger without Tesco’s consent during the lock-up period of five years from the Effective Date.

 Reflecting Tesco’s improved performance and the Tesco Board’s confidence in its future prospects, the Tesco Board has reviewed its dividend policy and intends to recommence paying dividends in respect of the financial year 2017/18. The Tesco Board expects dividends to grow progressively from that financial year with the aim of achieving a target cover of c.2x earnings per share over the medium term.

Tesco and Booker have agreed that Booker Shareholders will be entitled to receive: (i) any ordinary interim and final dividends announced, declared or paid by Booker in the ordinary course, in a manner consistent with past practice, and with a record date falling prior to the Effective Date; and (ii) a special dividend in respect of the financial year ending 24 March 2017 which Booker intends to pay in lieu of the annual B share scheme (as stated in Booker’s interim results announcement on 13 October 2016), in each case as described in Appendix 7.  In addition, Booker Shareholders will also be entitled to receive a Closing Dividend soon after the Effective Date, as described in Appendix 7. This dividend will reflect the principle agreed between Tesco and Booker that Booker Shareholders should receive a dividend payment equal to the accrued but unpaid ordinary dividends that they would otherwise have expected to receive as a Booker Shareholder in respect of the period from the end of the last financial period for which a dividend was announced, made, declared or paid until the Effective Date, such payment to be reduced by any dividends that a Booker Shareholder would be expected to become entitled to receive as a holder of New Tesco Shares after the Effective Date in relation to the same period. Appendix 7 sets out further details of the dividend entitlements of Booker Shareholders.

The shareholders of the Combined Group will benefit from a leading market position in both the ‘in home’ food market and the faster growing ‘out of home’ food market. In addition, the Merger will combine Tesco and Booker’s capabilities and skills and provide a platform for substantial growth and to realise revenue and cost synergies. 

The Merger is expected to: generate a Return on Invested Capital in excess of Tesco’s cost of capital in the second full financial year following the Effective Date, and significantly in excess of Tesco’s cost of capital in the third full financial year as the synergy benefits are delivered;  be accretive to Tesco’s earnings per share (excluding the effects of implementation costs) in the second full financial year following the Effective Date; and be beneficial to Tesco’s leverage metrics.

Opportunities for revenue and cost synergies have been identified which support the significant shareholder value creation opportunity of the Merger. The Tesco Board expect pre-tax synergies for the Combined Group to reach a run-rate of at least £200 million per annum by the end of the third year following completion of the Merger. Quantified revenue synergies of at least £25 million per annum are anticipated to come by the end of the third year following completion of the Merger, primarily from an enhanced offering and customer proposition. The Tesco Board also believes that there is significant opportunity for further revenue synergies which have not been fully quantified for reporting under the Code at this stage. The Merger is also expected to enable opportunity for cost synergies of at least £175 million, mainly in areas such as procurement and distribution.

Industry Overview
A move in shopping propensities, wild rivalry from Aldi and Lidl, and the entry of Amazon has incited retailers to reinforce their organisations by purchasing food wholesalers. Notwithstanding losing piece of the overall industry as of late, Tesco remains the UK’s greatest grocery store with an market share of around 28%. The retail business is experiencing a time of fortification. A move in shopping propensities, wild rivalry from Aldi and Lidl, and the entry of Amazon has incited retailers to reinforce their organisations by purchasing food wholesalers.

Recently, investors in Nisa Retail Limited accepted a £137m takeover by the Co-operative Group, trading as The Co-op. Morrisons likewise completed an arrangement to wind up the store chain McColls and it has additionally built an association with Amazon.
Tesco is using Booker to get a bigger slice of the £85bn “out-of-home” market, which it sees as growing faster than so-called “in-home” eating. Eating out will continue to rise, while delivery and convenience will be “key customer requirements”. 

More people are eating out – and Tesco wants a part of it
What will happen if stores overlap?
Retail property agents have suggested that Tesco will try to sell some stores where there are a number in the same location. One agent pointed out that it makes no sense to supply multiple stores in the same place, suggesting that Tesco would be “cannibalising” itself. Instead, it is likely to watch shoppers’ habits over the next few months, and jettison the worst performing stores. While it can’t sell off franchised stores that it does not own, it could choose not to renew agreements with retailers.
What is the upshot for consumers?
If Tesco is true to its word, shoppers will have more choice when they visit their local convenience stores; Booker boss Charles Wilson pointed to the potential offered by the former’s “unbelievable” fresh food offer. The combined business will also have a network of 8,000 click and collect points, making it more convenient than ever to have someone else pick and pack your groceries. It remains to be seen whether the “synergies” promised by the deal will keep a lid on price rises, or whether the takeover will in fact give independent retailers less choice in who supplies their goods – and hand yet more power to Tesco.

Tesco gets a foothold in the restaurant business. Tesco is set to supply high street restaurants such as Wagamama and Byron Burgers as it extends its reach in the “evolving” food market following the agreement.The £3.7bn move means that Tesco has taken over the supplier to a string of restaurants, including Carluccios, Rick Stein and Loch Fyne as it looks to expand its presence in the “out of home” food market. The wholesaler also holds a Royal Warrant, a mark of recognition of those who supply goods or services to royal households. It can also count the England and Wales prison service and most of the country’s cinema chains as its customers.
“The UK food market is worth about £200bn a year. It is extremely vibrant and it is evolving enormously,” said Tesco chief executive Dave Lewis. “When you look at customers and how they engage with food, the way they want to engage with it is changing. 
“Increasingly more and more of it is consumed on the go, and there is a big delivery element involved in that. It is that evolution of food and the opportunity of serving those customers better that is the fundamental bedrock on which this merger is based.” Sam Dean

Closing Remarks and Post-Closing Performance
By uniting Tesco and Booker’s retail and discount mastery, inventory network and advanced capacities, the Combined Group will have the capacity to give more noteworthy options, enhanced quality, and reduced cost in the food market, while enhancing productivity and diminishing food squander. It will build the foundation upon which new development can take place and precipitate noteworthy income and cost synergies. 

This merger will help charm buyers with better accessibility of value items at appealing costs crosswise on all parts of retail and eating out areas. Additionally, it will make life easier for retailers, cooks and firms by additionally enhancing selection, cost and assistance, with improved computerised and conveyance benefit alternatives. The combined group will exhibit a more extensive market for providers, with solid development prospects. It would cut waste and enhance productivity by making a more extensive, multi-channel accomplice who will work with agricultural cooperative over their full rural harvest. Furthermore, they will have the base to make noteworthy steps to open doors for coaction and alliance while holding market-driving retail and discount aptitude. It has the potential to serve clients and customers better in an ever-growing industry with state-of-the-art merchandise.
Tesco may have hit the jackpot. Dave Lewis still has a few questions to answer. What number of its 1,700 stores will it be willing to offload to get this arrangement through? At the end of the day, Tesco is betting on the out of home market. Will Tesco be able to re-consolidate in order to achieve what is sees as the greater long haul prize? After a top to bottom look,  The making of a massively compelling business now looks relentless.

Points for Discussion

• What would Tesco have to achieve for this acquisition to be considered a success?
• How will the current market effect Tesco’s repayment of debt?
• Will Tesco stay true to its word by being beneficial to customers after the acquisition?
• Will Tesco further expand Booker’s initial progress in India?