LONDON (Reuters) - Britain’s biggest supermarket Tesco (TSCO.L) last week agreed a 3.7 billion pound ($4.6 billion) cash and shares takeover of Booker BOK.L, the country’s largest wholesaler, that would increase its dominance of a 195 billion pound food market.
The deal was welcomed by investors with Tesco and Booker’s shares soaring 9 percent and 16 percent respectively.
However, the transaction will face scrutiny from competition authorities as it will add to Tesco’s more than 28 percent share of the overall UK grocery market and more specifically its influence in the convenience, confectionery and tobacco markets.
Though Booker only owns a handful of stores, it has over 125,000 retail customers, supplying independent retailers who trade under its Premier, Family Shopper, Budgens and Londis brands. It is also Britain’s largest cash and carry operator with over 200 branches.
Below are details of the key steps of the regulatory process and the views of the major protagonists:
Britain’s Competition and Markets Authority (CMA) will consider the deal.
Analysts and investors said the complexity of Tesco and Booker’s businesses meant unpicking the competition implications was a huge challenge to the CMA’s processes and the outcome difficult to predict.
They said a lot depended on how the CMA defines the markets the two companies operate in - whether it looks at the UK grocery market as one or splits it between mainstream supermarkets and smaller convenience stores.
“How an earth is the CMA going to determine the competitive dynamics within and between districts where a (Tesco owned) One-Stop trades against a Premier and Londis?,” asked Shore Capital analyst Clive Black.
“What about where a Tesco superstore has a (smaller) Premier and Budgens close by or more parochial still, a Tesco Express and a Family Shopper.”
The deal was announced on Friday and the CMA will already be poring over the details of Tesco’s proposal.
“We’ll engage with them over the next few days and weeks,” said Tesco Chief Executive Dave Lewis.
After a short period the CMA will formally confirm the start of a Phase 1 investigation, inviting interested parties to comment.
That will be the chance for competing retailers, wholesalers, foodservice providers and their respective supply chains to make their representations.
After up to 40 working days the CMA could clear the deal, ask Tesco and Booker to offer “undertakings in lieu” or concessions to avoid a more detailed Phase 2 investigation, or refer the deal to a Phase 2 probe.
Analysts see referral to an in-depth Phase 2 investigation as inevitable.
If that inquiry, which lasts up to 24 weeks, does not find a lessening of competition, the transaction will be cleared. If a lessening of competition is found, the CMA can either seek remedies or block the deal.
Lewis said that as the deal was essentially a retailer and a wholesaler coming together it was not an acquisition of stores and therefore not detrimental to competition.
“What we think will happen is by coming together ... independent retailers get a better deal here than perhaps they do on a standalone basis,” he said.
Booker CEO Charles Wilson said the deal was “pro-competition”, with benefits for consumers and customers who will see better choice, prices and service.
“We’ve had good advice on this and that’s why we think we’ve got a very compelling story to take them (the CMA) through,” he said.
“Some retailers will welcome this, others will be concerned about competing with stores supplied through the merged Booker and Tesco business, and some will be uneasy at the prospect of working in partnership with one of their biggest historical competitors,” said James Lowman, CEO of the Association of Convenience Stores.
Tesco and Booker said they do not expect the deal to become effective until late 2017 or early 2018. That’s a big clue that they expect the deal to be referred to a Phase 2 probe.
Reporting by James Davey; Editing by Mark Potter