Another City investment heavyweight is attacking Tesco's mega-merger with Booker

LONDON — Hermes Fund Managers criticised Tesco’s planned £3.7 billion ($US4.6 billion) mega-merger with wholesaler Booker, less than a week after two of Tesco’s biggest shareholders also attacked the deal.

Saker Nusseibeh, CEO of Hermes, told The Times: “My worry is this puts too much pressure on corner stores. Too much power in the hands of any one supplier is never a good thing. In the long term there could be a backlash against them [Tesco].”

Hermes is not an investor in Tesco but is what is known as a “stewardship consultant,” providing advice and investment strategies to other funds and asset managers. It is owned by the BT Pension Fund and manages billions of pounds on behalf of others.

Supermarket Tesco announced plans in January to buy food wholesaler Booker in a £3.7 billion deal. The merger, the first big deal since Tesco CEO Dave Lewis came in to rescue the company from an accounting scandal, would give Tesco a slice of the “out of home” food market — eating out and catering — which is growing faster than supermarket sales.

However, Schroder Investment Management and Artisan Partners, Tesco’s third and fourth largest investors with stakes of 4.49% and 4.48% respectively, last week attacked the deal, saying they thought it would destroy value for shareholders.

Schroders fund manager Nick Kirrage wrote in a letter:

“All management teams believe that their acquisitions will create value. However, there is compelling academic and empirical evidence that, on average, acquisitions destroy value for acquiring shareholders. We believe that the high price being paid for Booker makes the destruction of value even more likely.”

The Tesco-Booker tie-up also faces competition hurdles. As Nusseibeh flagged, the deal would give the pair huge control over the supply chain for many convenience stores. Bookers owns well-known chains Budgens and Londis, and supplies countless others.

Tesco has repeatedly defended the merits of its deal and told the Times: “With a business decision like this, there will always be a range of different opinions. We remain absolutely committed to a deal that can bring benefits for all our stakeholders.”

Addressing criticism of the deal last week, Bernstein’s retail analyst Bruno Monteyne said in a note to clients: “Two national supply chains whizzing products across the UK is less efficient than one. Tesco’s buying terms are hugely better than Booker’s: Booker customers will be way better off with those lower sourcing costs, better ranges and higher service levels.

“We haven’t seen any credible push back on the potential economic merits.”

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