What Tesco plc investors should make of Booker Group plc’s Q4 results

Booker Group plc (LON: BOK) has published a healthy set of results but Harvey Jones still has little appetite for its proposed merger with Tesco plc (LON: TSCO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Attitudes towards Tesco‘s (LSE: TSCO) proposed £3.7bn takeover of grocery wholesaler Booker Group (LSE: BOK) have been mixed, with the company’s share prices rising on the news, but major shareholders expressing opposition. Booker has published its fourth quarter results today, so what do they tell us about the likely fate of the merger?

No smoke without fire

The headlines have focused on how the new tobacco display ban and plain packaging restrictions have hit Booker, with tobacco sales down 7.5% on a like-for-like basis. This is to be expected, because everybody knows that government pressure on the nation’s dwindling band of smokers will only intensify. However, it won’t worry Tesco boss Dave Lewis, who is pursuing Booker for its food operations.

On this front the news is good, with group non-tobacco sales rising 4.7% like-for-like. Booker chief executive Charles Wilson said franchises Budgens and Londis are performing well, while internet sales increased a healthy 8% and Booker India continues to make progress.

Charles Wilson’s war

Total sales for the year to 24 March 2017 rose 6.7% to £5.3bn, and Booker ended up with approximately £160m in net cash. Wilson hailed the period as “a good year“, with good customer satisfaction scores and sales “the best we have ever achieved”. 

There is nothing here to derail the Tesco bid. Lewis wants to create “the UK’s leading food business” (I thought he already ran it), by integrating Booker’s cash-and-carry wholesaler operations, which supply food to 120,000 independent retailers nationwide, while the group also owns the Londis, Budgens and Premier franchises. Its food service arm supplies high-street chains such as Wagamama as well as pubs, caterers and Rick Stein’s restaurants, and its direct arm generates £1bn of online sales to M&S and others.

The merger should also speed up Tesco’s push into the fast-growing convenience market, adding 5,400 stores to its 2,900-strong network of Tesco Express, Metro and One Stop brands. It reckons this will save it £200m a year and boost annual profits by £25m.

Ground for concern

The Competition and Markets Authority (CMA) may yet block the deal, which is also running into resistance from major Tesco shareholders, who think Dave Lewis is paying too high a price. Schroders and Artisan Partners, who collectively own 9% of Tesco, have asked it to pull out. Schroders fund manager Jessica Ground reckons that most acquisitions destroy value for acquiring shareholders. This is particularly true if you overpay in the first place, as many think Tesco is doing.

Today’s results from Bookers won’t affect the bid but it could backfire for other reasons, such as potential CMA intervention and the distraction of integrating Booker’s sprawling operations – Tesco already has quite enough on its plate. For me, the killer is that I did not rate Tesco even before the added uncertainty this deal will bring. I cashed out of the supermarket sector several years ago, and the Booker deal will not tempt me to carry myself back in.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Booker. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »