Just when you thought you heard the popping of champagne corks at Tesco headquarters, a leading shareholder advisory firm has questioned whether both parties are getting a fair crack of the whip.
Institutional Shareholder Services (ISS) has recommended that Booker shareholders vote against the company's planned merger with Tesco, claiming that said shareholders will see 'limited potential benefit' from the synergies emerging from the deal.
It is anticipated that the deal will be completed on 5 March, with Booker shares expected to cease trading on 2 March.
Better Deal
However, ISS says that the terms of the deal indicate that Tesco is "getting [a] better deal" than the wholesaler from the transaction.
"The merger presents attractive growth opportunities and strong rationale for Tesco, underpinned by significant expected synergies, while the rationale for Booker shareholders to give up control appears less than compelling, at the relatively low premium offered," it said via a briefing note.
ISS added, "The current mechanism to pay only 65% of FY’18 earnings as a closing dividend appears unjustified, given that the expected closing date of the deal coincides closely with Booker’s fiscal year end, and that, in anticipation of the Tesco transaction, Booker paid out to shareholders all its earnings for the previous fiscal year."
Notably, ISS also noted that should the deal fall apart in the eleventh hour, there is a "seemingly limited downside risk" for Booker's shares.
"While its share price has been capped by the offer, the company's closest peers have enjoyed a strong increase in stock price since the deal was announced last year," ISS said. "At the low end of current analyst target prices, Booker’s downside risk is 5%. Moreover, the company delivered strong operating performance so far, in H1 2018 and Q3 2018."
Based on these considerations, it said, the transaction "does not warrant support at the current terms".
Sandell Concerns
ISS also noted the concerns of Sandell Asset Management, which holds 1.75% of shares in Booker: the firm announced its opposition to the transaction on 8 February, citing the payment of 65% of earnings as unsatisfactory.
Sandell sees Tesco as "an inferior stock to Booker", ISS notes, due to Tesco’s lower dividend and margins, higher capital intensity, and lower returns on capital.
Furthermore, ISS says that Sandell argues that the market “has re-rated since the deal announcement”. Booker’s earnings have grown in the period since, and the "offered premium is too low, considering that Tesco is effectively acquiring control over Booker, and that synergies disproportionately accrue to Tesco shareholders".
Tesco Positive
ISS also weighed up the transaction from Tesco's point of view, recommending that the retailer's shareholders vote in favour of the proposed transaction.
It made this assessment based on the "compelling strategic rationale in support of the acquisition, which is underpinned by significant expected synergies", as well as the "reasonable valuation, given the growth prospects, operational efficiency and profitability of the target".
ISS also noted the "substantial positive market reaction" to the deal when it was announced, and, indeed, when the UK regulatory authorities approved the transaction.
Don't pop those corks just yet, Tesco.
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
