Tesco merger with Booker gets provisional approval from CMA

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

Last month seven of the UK's largest wholesalers who all voiced concerns that the deal would "threaten the survival of the independent retailer". It just goes to show that if you're the biggest retailer in the land, getting even bigger is no problem.

The U.K. Competition and Markets Authority provisionally cleared a merger between Great Britain's number one grocer Tesco, and wholesaler Booker, noting that the level of competition in their respective markets is sufficient to counterbalance any rise in prices or reduction in service levels.

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

It had raised worries that there could be a potential for Booker to reduce the wholesale services or terms it offers the stores it now supplies, in order to drive customers to their local Tesco.

Similarly many of Tesco's shareholders have begun to cool on the deal as an initially v-shaped recovery in the group's fortunes has turned into a long campaign. Most analysts had expected that Tesco would have to agree store disposals to gain clearance.

It examined evidence from Tesco and Booker, which represent the UK's largest retailer and wholesaler respectively, as well as evidence from over 65 wholesalers, suppliers and retail chains, and a survey of hundreds of retailers.

In particular, it found that Tesco does not supply the catering sector that accounts for more than 30 percent of Booker's sales.

The group, recognising that Tesco's shops nevertheless compete with Booker-supplied shops, considered the impact of the merger in every local area where a Tesco and a Booker-supplied shop are both present (over 12,000 shops). 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.

However, it also concluded that the wholesale market would remain competitive in the longer term, noting that Booker's share of the United Kingdom grocery wholesaling market - at less than 20 per cent - was not sufficient to justify the longer-term concerns.

Retail analyst Bruno Monteyne at Bernstein said the tie-up would make Tesco "not only the biggest grocer in the United Kingdom but also one of the fastest growing food retailers in the United Kingdom for many years to come".

Earlier fears during the investigation were that there is an overlap with Booker-supplied franchises such as Premier, Londis and Budgens.

However, at United Kingdom stockbrokers Shore Capital, head of research Clive Black quipped the "Comedy Markets Authority strikes again".

Tesco expects to complete the merger in early 2018.

"As for the rest of the United Kingdom food system, well colourful language and dismay nay apoplexy are probably understatements".

Both Tesco and Booker, the country's biggest grocery wholesaler, welcomed the CMA announcement. 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.

Vanessa Coleman

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