Thousand yard store

27 January 2017 By John Foley Follow @johnsfoley

A near-20 billion pound merger with wholesaler Booker is a smart response to disruption of the UK group’s traditional supermarkets. But it will worry suppliers, who will provide most of the big cost savings. And Tesco may use its surplus to cut prices rather than hike dividends.

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Tesco said on Jan. 27 that it would merge with Booker through a cash-and-shares transaction. Booker, a UK food wholesaler, would emerge with 16 percent of the combined group, which would combine Tesco's supermarkets with a network that supplies 700,000 retailers, small businesses and restaurants.

Booker shareholders would get just under 0.9 Tesco shares and 43 pence in cash for each share they hold, giving the company a value of approximately 3.7 billion pounds. The two said that represented a premium of 12 percent to their closing price on Jan. 26.

The deal requires competition clearance from the UK regulator, and the companies expect it to complete at the end of 2017 or beginning of 2018.

Tesco said it hoped to generate 200 million pounds of annual synergies, of which 175 million pounds would be cost savings. Just over half of those would come from procurement.

Charles Wilson, Booker's chief executive, will join the combined group's executive committee after the merger. He holds 6 percent of Booker's shares. Chairman Stewart Gilliland will also join Tesco's board.

Tesco shares rose 7.2 percent by 0815 GMT on Jan. 27 to 202 pence, while Booker's shares rose 14 percent to 208 pence.

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