City A.M - Will Tesco need to sell off stores to win Booker deal approval?

Pressure is building on Tesco and Booker after it was suggested that the former might be forced to sell off hundreds of small stores as they face an “uphill battle” to win competition approval.

Concerns around whether the deal can win Competition and Markets Authority (CMA) backing has emerged after two of Tesco’s biggest shareholders, Schroders and Artisan Partners, last week spoke out against its £3.7bn takeover of Booker.

Matt Evans, a competition partner at law firm Jones Day, said that in order to convince the CMA to allow the deal past a phase one investigation Tesco might have to sell a number of stores, probably Tesco Express outlets.

One challenge facing the firms will be convincing the CMA that Booker does not control its “symbol stores”, which are run by independent shopkeepers under the company’s brands, including Londis and Budgens, Evans told City A.M.

He added: “My hunch is that divestments will be needed, but Tesco has a shot at avoiding it come the end of a phase two review.”

“If the CMA clears the deal outright, assuming that it agrees with the Tesco-Booker stance, I think there would be a degree of uproar,” Shore Capital retail analyst Clive Black told City A.M.

“Given how the CMA has got into the very narrow details of the retail industry in recent years, it would be almost unthinkable that they could wave this through [without concessions].”

He added: “I don’t think it’s fanciful to suggest that the combined entities may have to dispose of quite a lot of space. And that would then cause a rethink of the whole merits of the deal.”

Senior industry sources told the Telegraph they thought the deal will give the combined group too much influence over the UK’s food supply. The Sunday Times reported over the weekend that Lansdowne Partners, Axa and Jupiter have strongly reduced their stakes in Booker since the Tesco deal was agreed at the end of January.

After it emerged that Schroders and Artisan were unhappy with the deal last week, Freddie Lait, the founder and chief investment officer of Latitude Investment Management, which holds a stake in Tesco, told City A.M.: “The timing of the merger is difficult for current Tesco shareholders to digest as it is a clear distraction for management, and will result in inevitable integration costs and other frictional issues.

Therefore, it is likely that the underlying turnaround story which was making solid progress will be masked or delayed to some extent.

However, there is certainly strategic merit in the deal that positions Tesco in front of a new customer base which is growing faster and appears to be far more resilient than their underlying big box retail business.

At this mature stage in the supermarket sector’s life cycle, consolidation and vertical integration are essential, and will add benefits in the longer term through further cost cutting, increased scale and greater diversity of customers.

Tesco and Booker declined to comment.