March 27, 2017 / 5:14 PM / 3 years ago

Big Tesco shareholders oppose $4.7 billion Booker deal

LONDON (Reuters) - Two of Tesco’s (TSCO.L) biggest shareholders have called on the supermarket group to withdraw its 3.7 billion pound ($4.7 billion) agreed offer for wholesaler Booker BOK.L, potentially casting doubt on the deal’s progress.

A company logo is pictured outside a Tesco supermarket in Altrincham northern England, April 16, 2016. REUTERS/Phil Noble/File Photo

Schroder Investment Management (SDR.L) and Artisan Partners, Tesco’s third and fourth largest investors with stakes of 4.49 and 4.48 percent respectively, both said on Monday they were against the transaction.

In a letter to Tesco Chairman John Allan, Schroders fund manager Nick Kirrage and the asset manager’s global head of stewardship Jessica Ground called on investors who share their view to speak out against the deal announced on Jan. 27.

“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,” they wrote in the letter, seen by Reuters.

“We believe that the high price being paid for Booker makes the destruction of value even more likely.”

No comment from Tesco was immediately available.

Daniel O’Keefe, lead portfolio manager of Artisan’s Global Value funds, told Reuters buying Booker was a distraction for Tesco’s management and a risk not worth taking.

“Booker is a new business for Tesco, it’s going to involve a lot of distraction for management, unforeseen risk, and unforeseen issues,” he said.

O’Keefe said Artisan had expressed its concern over the merits of the deal to Tesco management.

“They are still in favor of the transaction, we’re not,” he said.

The stances of Schroders and Artisan were first reported by the Financial Times.

Richard Cousins, CEO of Compass (CPG.L), the world’s biggest catering firm, resigned as Tesco’s senior independent director on Jan. 3 because he did not support the deal.

“This demonstration of integrity delivers a powerful message about his concerns around the merits of the deal,” said Schroders.

By buying Booker, Tesco is looking to increase its exposure to Britain’s 85 billion pound “out of home” food market, including cafes, restaurants and takeaways, which is growing at a greater pace than the 110 billion pounds “eat at home” market.

A branded sign is displayed outside of a Booker Wholesale store in London, Britain January 27, 2017. REUTERS/Neil Hall

Share prices in both companies rose sharply when the deal was announced. However, Tesco’s shares have since fallen on concerns the deal faces a lengthy competition investigation.

Tesco shares are down 8 percent so far this year while Booker’s are up 14 percent.

Though Tesco and Booker maintain they have a compelling competition case the deal is expected to face intense scrutiny from Britain’s antitrust 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.

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