Bernstein: We spoke to Tesco's investors about the Booker merger -- here's what they said

LONDON — Analysts at Bernstein have been surveying investors to get their take on Tesco’s planned mega-merger with wholesale food retailer Booker, following some high-profile objections from Tesco investors.

Bernstein’s Bruno Monteyne, who was a Tesco executive before becoming an analyst, writes in a note sent to clients on Thursday: “We estimate based on the survey that the deal today would be approved by 70% of votes cast… with the remaining 30% being entirely against the deal or wanting material changes.”

Supermarket Tesco announced in January plans to buy wholesale food supplier Booker, to help it get a slice of the “out of home” food market — restaurants and catering companies supplied by Booker.

Two of Tesco’s biggest investors — Schroders and Artisan Partners — have since come out against the proposed £3.7 billion ($US4.6 billion) deal, saying the price is too high and will destroy value for existing shareholders.

Schroders and Artisan’s public objections have led to speculation that more investors may oppose the deal, putting it in jeopardy.

Monteyne and his colleagues surveyed 135 investors, 57 of whom are Tesco investors representing 50.0% of the supermarket’s market value. They concluded that approval is likely.

Bernstein says: “If Schroders & Artisan want to block the deal, it will be hard but not insurmountable. There are sufficient large holders that haven’t disclosed their view that could sway this estimate.”

Investors representing 13.3% of Tesco’s market cap who got back to Bernstein said they were not publicly disclosing a position on the deal. If they could be swayed, the balance of sentiment could shift radically.

But Bernstein says: “If their intent is to convince other shareholders to follow them, then odds are not good: only 4% of all the additional shareholders we surveyed are taking their view (publicly).

‘The timing of the Booker deal could prove a distraction’

Of those who raised concerns about the deal, the main objection is that it will distract management and risks failing. Bernstein quotes an unnamed investor as saying: “Perhaps [Tesco CEO] Dave Lewis feels Tesco is pretty much fixed and they can swallow Booker without a hiccup, but the risk is that the timing of the Booker deal could prove a distraction to the core business.”

Some investors are also concerned about the price Tesco is paying for Booker and the apparently limited upside. An unnamed investor says: “The turnaround in the UK will drive significant value creation, about £11 billion by my calculations.

“The booker acquisition is very expensive and even if it goes very well, the payoff for shareholders is modest. If they grow the value of the booker investment by 20%, it’s £750 million of value. Why on earth would you risk £11 billion of value for £750 million of value?”

Tesco CEO Dave Lewis, left, and Booker CEO Charles Wilson.TescoBooker CEO Charles Wilson is seen as a key plus.

However, the strongest argument in favour of the merger is that it could end up being an astute, forward-looking deal. The benefits may be difficult to measure or forecast now but, as one unnamed investor says: “It reflects some of the changing nature in how consumers ‘consume/purchase’ their food. More people are eating away from home and those that are not are changing what they eat, how they prepare it (if at all), and how/where they consume it.”

The fact that Booker CEO Charlie Wilson is also coming on board and committed to stay at Tesco for at least 5 years is also seen as a big plus. Wilson is highly regarded in the industry and seen as a potential successor to Lewis.

Interestingly, Bernstein found investors who didn’t have money in Tesco were more likely to think the deal is a bad one. 60% of non-Tesco investors surveyed think the deal is a “bad idea entirely or should have materially different terms.”

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