Blog: Dean BestTesco-Booker deal gets green light as UK grocery landscape shifts

Dean Best | 14 November 2017

Here in the UK, we've had two significant pieces of M&A news in the grocery retail channel in the last 24 hours.

Yesterday, The Co-op, the UK's sixth-largest food retailer, took a step nearer buying the local convenience-store and wholesale business Nisa after winning the support of its target's members.

This morning came even bigger news.

The UK's Competition Markets Authority announced it had "provisionally concluded" a move by Tesco, the country's largest grocer, to buy Booker, its largest wholesaler, "does not raise competition concerns".

Tesco and Booker stunned the market in January when they announced their plans to join forces.

They insisted the deal would bring a "broader market opportunity" for suppliers and "help" independent retailers, caterers and SMEs on their ranges, price and service, the planned merger sparked fierce debate throughout the industry about what it could mean for competition.

However, the planned merger sparked fierce debate throughout the industry about what it could mean for competition.

Critics saw the deal as creating a business that would bring together the Tesco Express convenience-store chain with other UK c-store retailers like Budgens, Londis and Premier.

The then Nisa chief executive Nick Read reportedly said in April there would be “an enormous amount of pain” from the Tesco-Booker deal, telling The Daily Telegraph the larger player emerging from the transaction could hit his business. Read said he expected Tesco to be asked by the CMA to sell stores.

Tesco and Booker sought to play down those concerns by saying the Budgens, Londis and Premier chains were not owned by the wholesaler, which operated that side of its business under a franchise model.

And this morning, the CMA said its “in-depth review” of the market had found “Tesco as a retailer and Booker as a wholesaler – supplying to caterers, independent and symbol group retailers including Premier, Londis and Budgens – do not compete head-to-head in most of their activities”.

It added: “In particular, Tesco does not supply the catering sector to which Booker makes over 30% of its sales.”

The CMA said competing wholesalers had expressed concerns Booker would benefit from improved suppliers’ terms after the merger, making it difficult for them to continue to compete. They argued that as a result, in the longer term, Booker might be able to raise prices to the shops that it supplies, the regulator revealed.

The CMA argued it was likely Booker would be able to negotiate better terms from a number of its suppliers for some of its groceries – but that the wholesaler was likely to pass on some of the benefits of these savings to the shops that it supplies. The regulator asserted the UK wholesale market would “remain competitive in the longer term”, noting Booker’s share of the UK grocery wholesaling market – at less than 20% – was “not sufficient to justify the longer-term concerns”.

Bruno Monteyne, an analyst for investment bank Sanford Bernstein covering Europe’s food retail sector, said: “The argument that Tesco and Booker don't compete directly in the convenience market won. The stores that are part of Booker's symbols (Budgens, Londis, Premier, etc.) are (almost all) independent stores that can buy part of their supply outside Booker and swap to a different symbol or wholesaler.”

However, at UK stockbrokers Shore Capital, head of research Clive Black quipped the “Comedy Markets Authority strikes again”.

In a note to clients, Black wrote: “Congratulations to Dave Lewis, Charles Wilson and their advisors on seeing off the UK Competition & Markets Authority (CMA) and so gaining tacit approval for their merger, which should complete in early 2018, as the management always guided.

“As for the rest of the UK food system, well colourful language and dismay nay apoplexy are probably understatements. The wholesale trade in particular will be wondering why on earth it ever bothered engaging at all with the CMA, an organisation that seemingly lives in a different universe to anything that may be considered a normal view of the world. If Tesco and Booker can merge with unconditional approval (with no proposed remedies), then the scope for further large-scale consolidation cannot be ruled out. Watch this space.”

Sectors: Private label, Retailers

Companies: Tesco

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