By James Davey and Sarah Young
LONDON (Reuters) - Britain's biggest retailer Tesco agreed a surprise 3.7 billion pound ($4.6 billion) takeover of food supplier Booker on Friday, increasing its exposure to the fast growing catering sector.
The planned cash and shares takeover shows the supermarket chain's renewed confidence after two years of gradual recovery under Chief Executive Dave Lewis after an accounting scandal.
The group also said it would restart paying dividends for the 2017-18 financial year, having not paid one since the second half of its 2014-15 year when it was mired in the worst crisis in its history.
Lewis joined in September 2014 when Tesco was rapidly losing market share to German discount rivals and has also had to deal with the fallout from the accounting scandal.
The former Unilever executive has simplified operations, revitalising its core grocery business in Britain, while cutting costs and selling assets including its South Korean business for $6.1 billion.
Friday's move marked a dramatic change of gear and signals even more focus on its British business where it has a 28 percent share of the grocery market.
"It's the next evolution of our strategy...We think it's the right time," Lewis told reporters, adding the deal was compelling in its own right and not a reaction to a tougher competitive environment. He said the two companies had been talking for more than a year.
However, analysts said the deal could face close regulatory scrutiny, particularly because of its impact on customers at smaller convenience stores and food industry suppliers.
Lewis said that Richard Cousins, CEO of Compass, the world's biggest catering firm, and Tesco's senior independent director before his Jan. 3 resignation, did not support the deal.
"He, for his own reasons, didn't feel it was something he supported," said Lewis. Cousins could not be reached for comment.
INVESTORS PLEASED
Shares in Tesco traded up 9 percent at 206p and Booker had risen 16.7 percent to 213.8p by 1550 GMT.
The deal would give Tesco a greater slice of Britain's 85 billion pounds "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.
Investors welcomed the transaction, that will also see Booker CEO Charles Wilson join the Tesco board.
"We were surprised, pleasantly," said Richard Marwood, senior fund manager at Royal London Asset Management which is a top ten Booker shareholder.
"Wilson has been a very well respected manager at Booker...Many people would see it as being a bit of coup having him go and work in Tesco," he said.
Tesco will gain exposure to the 120,000 independent retailers, 107,000 small businesses and 450,000 caterers Booker serves. Booker clients include chains such as Wagamama, Carluccio's, Byron, as well as celebrity chef Rick Stein.
Booker owns about 200 cash and carry warehouses in the UK and supplies the Budgens, Londis and Family Shopper grocery chains, which are run as franchise operations.
"This merger with Booker will further enhance Tesco's growth prospects by creating the UK's leading food business with combined expertise in retail, wholesale, supply chain and digital," said Lewis.
COMPETITION ISSUES?
Tesco and Booker said the deal would lead to synergies of at least 200 million pounds within three years, from procurement, distribution and central functions, and would boost earnings per share in the second full year of the deal.
Implementation costs would be about 145 million pounds. Lewis said no job losses had been identified.
However, analysts said the deal could face close regulatory scrutiny.
"Our instant reaction is that the Competition and Markets Authority will have a field day with this," said independent retail analyst Nick Bubb, noting that Tesco owns the One Stop chain that competes with Booker's interest in convenience store retailing.
However, Lewis and Wilson, who owns about 6 percent of Booker's equity, disagreed, saying their legal advice had indicated a "compelling story" to gain approval.
"As a retailer and a wholesaler coming together, this is not an acquisition of stores ... independent retailers get a better deal here than perhaps they do on a standalone basis," Lewis said.
Under the terms of the deal each Booker shareholder will receive 0.861 new Tesco shares and 42.6 pence in cash.
Based on Tesco's closing share price on Thursday of 189 pence the deal represents a value of 205.3 pence per Booker share -- a premium of about 12 percent.
The deal will result in Booker shareholders owning approximately 16 percent of the combined group.
Lewis said he thought the deal would complete in late 2017 or early 2018.
Greenhill acted as lead financial adviser to Tesco while Barclays and Citi also worked on the deal as financial advisers and corporate brokers on behalf of Tesco. JPMorgan was sole adviser to Booker.
($1 = 0.7972 pounds)
(Additional reporting by Kate Holton, Ritvik Carvalho and Pamela Barbaglia; Editing by Keith Weir)
Disclaimer: No Business Standard Journalist was involved in creation of this content
