Parts of the City had called for Booker to buy Metro Group’s UK arm Makro a year ago and, this week, the UK food wholesaler has announced a cash-and-shares takeover for the business. Analysts have welcomed the deal, even for a loss-making business, which also includes an ongoing “partnership” between Booker and Metro. Dean Best reports.
It was a deal that some in the City had called for a year ago. When Booker yesterday (31 May) announced a deal to buy struggling rival Makro, it brought to mind comments from RBS analyst Justin Scarborough, who 12 months ago, urged the UK food wholesaler to be “brave” and snap up its German-owned competitor.
On the face of it, the acquisition of Makro UK does look like a courageous move. The cash-and-carry firm, owned by German retail giant Metro Group, has had a challenging few years.
According to figures released yesterday by Booker, Makro UK ran up a pre-tax loss of GBP63.2m in 2011, over five times the losses it incurred in 2010. Sales fell 6.3% last year to GBP116.9m.
As Metro chief executive Olaf Koch said yesterday, Makro’s performance in the UK had been “unsatisfying”. Speaking to just-food in the wake of the announcement, a Metro spokesperson said it had seen “positive results” from changes to restructure the business but he added that “in the end, we think the business can be more successful within Booker”.
Wilson yesterday admitted Makro’s recent results were “not pretty”. Speaking to just-food, he argued Makro had suffered from increased competition from other wholesalers and UK multiples, as well as challenges in certain parts of the retail industry.
“We’ve seen people like Costco growing. Costco came into the market in 1991 and they’ve opened alongside a few of the Makros. Then you’ve seen as Tesco and Asda have broadened their ranges, some of the old Makro customers have said: ‘Look, it’s easier just to go into one of the big hypermarkets.’ With the Internet, you had the challenge of the electricals market, which used to be a real strength of Makro, you’ve seen them being picked off,” Wilson said. “There’s a number of people who’ve been taking bits of that business.”
Nevertheless, Wilson was upbeat about the prospects of the combined business. “Why are we doing this deal? The reason we are doing it is we’re seeking to become the UK’s leading wholesaler to caterers, retailers and small and medium-sized enterprises, with a wide range of food and non-food for Internet delivery and cash and carry,” he said.
“Credit to [Makro UK MD] Juergen Schwarze, credit to the team at Makro, the business is looking better than it’s looked for a while but they know it can still do better, too. If we can give the customers the choice, the price and the service they want, both the Booker and Makro customers will be better off as we go on this journey. The business has had some real challenges and we’re looking forward to doing a particularly better job for the professional customers.”
The City by and large welcomed the deal. Shares in Booker jumped 10% yesterday and were up again today. “This looks an excellent deal for Booker. It has proved it can turn struggling cash-and-carry businesses around and with anotherGBP800m on the top line, this will produce a stronger business with enhanced growth prospects,” Investec analyst Nicola Mallard, who has a ‘buy’ rating on the wholesaler’s stock, wrote in a note to investors.
Clive Black, analyst at Shore Capital, said Makro “lacked scale and had not been focused or competitive enough” but outlined a number of benefits Booker could enjoy.
“Combined with Booker’s circa GBP3.9bn of revenues, the new entity is demonstrably more substantial and we can see reasonably classic combination benefits ensuing; taking out duplicate central overheads, making Makro stores more productive, perhaps with some overlap closures, and possibly capturing some buying and merchandising benefits both ways,” Black wrote.
The proposed deal, however, is not merely a straight-forward takeover. It is a cash-and-shares transaction, one in which Metro, the world’s fourth-largest retailer, will take a 9.9% stake in Booker.
The UK firm and Metro have also agreed to form a “strategic partnership agreement” to “facilitate competence sharing”, which will include areas including supply chain management, marketing and own label.
“We see this outcome as a very good one for Metro and it will be interesting to see if the tie-up deepens over time,” Black said. “Could there be collaboration in India for example where both companies trade or, more blue sky, could the Metro empire come under Mr. Wilson’s control some time?”
Speaking to reporters, Wilson was coy about the prospect of adding other Metro cash-and-carry assets to Booker’s portfolio. “I think this is going to keep us very busy. We’ve got a lot to do here.”
The two companies operate stores in India but Wilson said the “strategic partnership”, at present, did not include plans to work together in that market.
“India hasn’t been included,” he told just-food, although he added: “We’ve got a business in India, they’ve got a good business in India but it wouldn’t surprise me if at some point if we sat down with the team over there to see if there opportunities on collaborative or helping building supply chains. The cost of building supply chains isn’t cheap. In India, they tend to focus on different customers. We’re much more focused on the kirana shop. That’s where there could be opportunities to co-operate and collaborate as well.”
Charles Hall, head of research at Peel Hunt, said the agreement was an important one for Booker. “The fact that Booker has Metro on the shareholder roster is a meaningful change. Joint director meetings every month is more than a loose collaboration; it’s a level of commitment from senior management,” he told just-food. “There’s clear opportunities for them to work together and maybe sourcing from India and maybe other countries.”
Reflecting on the deal as a whole, Hall added: “This is a major deal for Booker and does bring an element of risk. However, this is a management team that has consistently delivered and we would back the team to make this acquisition work.”