Louise Cooper Finance economics markets retail business

With Booker, Tesco get a prize..

Friday, January 27th, 2017

Tesco has chosen vertical integration with the “merger” with Booker.
Sainsbury’s choose horizontal diversification buying Argos
Both deals show the continuing difficulties of the food retail business.
Both strategies are worthy, although if you are committed to food retail, I prefer the Booker deal.  

What it does say is that pressure is still huge on industry, even if Christmas was a bit better.  And it means the pressure is not going away anytime soon, which is great news for consumers and less good news for the other players.

Last night I went shopping to Aldi and the pricing discount is still immense.  I have not got the time to go through the entire till receipt to calculate the total amount saved but a few struck me:
Brioche loaf at Aldi £1.39 Tesco £2
Cheese and onion quiche £1.29 at Aldi and £2 at Tesco
Aldi grapes £1.85 Tesco £2
Smoked mackerel fillet £1.29 at Aldi and £2.51 at Tesco
Packet German baked Ham 89p Aldi Tesco same size packet £1.80
12 waffles 75p at Aldi £1.20 for 8 at Tesco

Aldi and Lidl also have great own brand (as regular readers will know I love their face cream).  One of the reasons for the merger stated in the press conference call is that Booker should help Tesco develop its own brand.  I think part of that is to help compete with Aldi and Lidl which have great own brands at very low cost (Aldi and Lidl custard is just as good as Ambrosia and Jaffa cakes are actually better than McVities).   However Bookers’ Happy Shopper is an appalling own brand.

Bookers’ market cap is £3.7bn and Tesco is valued at £17bn.  This isn’t a merger.  Its a takeover dressed up as a merger so that Bookers’ Charles Wilson stays in a high powered and well paid job.  However that is not necessarily a bad thing because it means Tesco won’t overpay for control in a hostile situation.  And it means that Tesco has had full access to Bookers’ accounts.  But it does mean that Bookers’ shareholders may feel a little aggrieved as takeovers pay out more than mergers. 

Tesco share price is up 10% this morning so clearly the market likes the deal.  Normally shares in the acquiring company tend to fall on fears it will over pay. 
Bookers’ shares are only up 14%.  Normally in a takeover shares go up far more. 

Clearly the market thinks Tesco is getting Bookers on the cheap.   And therefore Bookers’ shareholders may feel a little cheated. But most of them will be Tesco shareholders as well, and so they probably won’t complain.

The fear that the Competition and Market Authority may disrupt the deal suggests how much more powerful Tesco could be after the merger.  The risk in deals is always execution and the fact its been called a merger and that the Booker boss Charles Wilson goes on to Tesco Board suggests there may be one too many egos in charge.

Tesco is the number one player which gives it a competitive advantage already and now the Booker deal makes it even stronger.

Sainsbury’s bought Argos
Tesco gets together with Booker
Morrison’s is recovering internally.
So where does this leave ASDA?

These are my opening thoughts.
I am now going to plough through the 100 pages sent from Tesco and the presentation.
On Theresa May’s trip to the US my quote from yesterday’s Daily Politics (where I was GOD)
“Hold you nose and do the deal”

See my twitter account for my updates: @Louiseaileen70

(And thanks to Iain Murrel for the Booker joke at the top of the page..)


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