Adamant the Booker deal is wrong for Tesco, Richard Cousins voted with his feet – so why does the acquisition have unanimous support from other non-execs?

Most major acquisitions of listed businesses result in value destruction. For once, extensive academic research over decades is unequivocal in its agreement on this point.

However, records continue to be broken in the volume and value of such deals.

Many turn into complete disasters, resulting in the chief executive departing or the acquirer being acquired. Poundland’s recent acquisition of 99p Stores, for example, went so badly that Steinhoff was able to acquire Poundland at a knockdown price.

I question why non-executive directors agree to such high-risk deals?

Invariably they support the chief executive and agreement is ‘unanimous’. Are non-execs adding value, or are they simply unconditional supporters of the chief executive or chairman?

Are they representing shareholder views and ensuring good corporate governance, or simply looking after their own interests?

Deal breaker

Tesco’s acquisition of wholesaler Booker triggered the resignation of senior independent director Richard Cousins, the chief executive of Compass, a global leader in catering.

Cousins’ philosophy in increasing shareholder value by five times since his arrival at Compass 10 years ago has been to maintain focus on the business by avoiding diversifications, major acquisitions and unnecessary complications.

He likes simple organisation structures, clarity of responsibility and a business the board understands.

Tesco, by contrast, has diversified into a myriad other businesses including cafes, restaurants and garden centres – although this plethora of non-core assets has been stripped back by boss Dave Lewis.

Excess store capacity

The UK grocery market is shifting to online and convenience, leaving retailers with enormous excess supermarket capacity.

Tesco has the most by far, and with the discounters also growing rapidly it is in the midst of a battle that will go on for many years.

With the rise of Aldi and Lidl, Lewis has rationalised ranges, cut prices, closed stores, sold off some of its overseas operations and stopped the dividend.

These actions have brought a temporary end to lost market share and a return to modest growth, albeit at much lower profit levels. Yet one suspects there are a lot more write-downs and costs to come.

Amid that backdrop, does the Booker deal and its timing make sense?

Cousins’ view appears to be that there is limited logic to the deal – it adds complexity and distraction at a time when Tesco is in the midst of a turnaround plan within a fiercely competitive and rapidly changing market.

John Colley, Warwick Business School

The shift to convenience store shopping is clear, while dining out in restaurants is also increasing – although forecasts of inflation surges may reduce demand.

There is some logic to Tesco moving further into the supply of convenience stores, something it already does with its One Stop symbol group.

But by adding Booker’s franchised fascias Budgens, Londis, Premier and Family Shopper to its c-store portfolio, the competition watchdog will be alerted.

The Competition and Markets Authority will scrutinise the deal and that may become protracted. Research shows distraction and uncertainty during such periods frequently leads to the haemorrhage of key staff and customers.

Mounting debt

What’s more, heavily borrowed Tesco is adding to its debt by paying £700m in cash plus the rest in shares.

While the premium to the undisturbed price is only 16%, the price is an enormous 28 times earnings.

Cousins’ view appears to be that there is limited logic to the deal – it adds complexity and distraction at a time when Tesco is in the midst of a turnaround plan within a fiercely competitive and rapidly changing market.

Its shareholders have not been receiving a dividend, although they are now promised some payment in 2017/18, presumably to gain support for this acquisition.

Cousins’ resignation shows how strongly he feels about the deal. However, he is not the chief executive of Tesco and is there simply to add advice, which may or may not be taken.

The grocer’s other non-execs were apparently unanimous in their support for the deal, which is worrying.

Perhaps it is time we saw more non-execs take Cousins’ lead and resign over similar risky and distracting acquisitions.