Tesco had a good Christmas. The trouble is, it needed a great one.
Chief Executive Officer Dave Lewis is trying to convince his investors to back the company's £3.9 billion purchase of Booker.
Some of Tesco's biggest shareholders have protested that the deal is a distraction from the supermarket's recovery, which is still only in its early days.
A knock-out Christmas would have banished any doubts, and paved the way for the deal to sail through shareholder votes at the end of February. Tesco didn't deliver that.
Instead, its third quarter UK same store sales were a touch below the Bloomberg consensus. It also missed expectations over the six weeks to January 6, when UK same-store sales rose 1.9%, compared with the Bloomberg consensus for a 2.8% increase.
Lewis blamed this on disruption from the slide of Palmer & Harvey, which delivered tobacco and some food items to Tesco stores, into administration. The company estimates this hurt same-store sales by about 0.5 percentage point. Even taking this into account, sales growth is still below consensus.
Tesco said the Christmas performance had been very strong on food, and fresh food in particular. But this didn't stop its share price falling more than 4.5%.
Increasing Competition
The supermarket's shareholders may argue that Lewis should set aside his Booker dreams and instead stick to mending the core business. But the result arguably shows that Tesco needs Booker more than ever.
Britain's grocers performed better than their non-food counterparts over the holiday period. But that was mainly driven by inflation, which boosts the value of sales. With Brexit related price increases due to ease as the year progresses, that tailwind won't last forever.
The German discounters enjoyed phenomenal sales growth over Christmas. Any supermarket boss who thinks their appeal is waning, needs to think again. Meanwhile, Tesco's rivals, Morrisons and Asda, are getting their act together.
Against this backdrop, Tesco needs Booker to bolster its buying power, and deliver synergies. With cost savings likely to be more than the £200 million announced, it could afford to be more generous.
The target's share price is trading above the value of Tesco's offer. Even taking into account the estimated 3.7 pence per share closing dividend, that implies some Booker investors think Tesco will have to pay more.
As Gadfly has argued, it would be worth Booker investors pushing for a higher price, particularly as their threshold for approval is higher than the level for for Tesco shareholders.
Dave Lewis shouldn't let his Booker prize slip away - even if that means splashing the cash.
News by Bloomberg, edited by ESM. Click subscribe to sign up to ESM: The European Supermarket Magazine.
