Tesco’s takeover of food wholesaler Booker has been thrown into doubt after two of its largest shareholders slammed the proposed £3.7bn deal.
Schroders and Artisan Partners, which own a combined stake of 9% in Tesco, have separately written to the supermarket giant’s chairman John Allan urging him to pull the plug on the tie-up.
The duo – Tesco’s third- and fourth-largest shareholders respectively – have spoken out against the “foolhardy” merger attempt and claim it will be an unwanted distraction for the grocer as it continues its turnaround efforts under chief executive Dave Lewis.
Tesco requires a majority of shareholders to vote in favour of the deal in order for it to go ahead.
But fund manager Schroders said in its letter to Allan that the price being paid for Booker would make creating value for shareholders “extremely challenging”.
It added that it would be lobbying other shareholders with similar views to voice them to Tesco.
‘Destruction of value’
The letter, signed by Schroders fund manager Nick Kirrage and global head of stewardship Jessica Ground, says: “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.”
Pointing out that Tesco is paying 23 times Booker’s peak operating profits under the terms of the deal, the letter argues: “We believe the high price being paid for Booker makes the destruction of value even more likely.
“We will be encouraging other shareholders who share our views to voice them. Thus we urge you to reconsider and withdraw your offer.”
“We will be encouraging other shareholders who share our views to voice them. Thus we urge you to reconsider and withdraw your offer”
Nick Kirrage and Jessica Ground, Schroders
Schroders also praised former non-executive director Richard Cousins for quitting the Tesco board in January over his opposition to the deal.
Schroders said of his resignation: “This demonstration of integrity delivers a powerful message about his concerns around the merits of the deal.
“We welcome Richard’s honest and forthright actions and would encourage other FTSE non-executive directors to follow his lead if they see fit.”
The fund manager of Artisan’s Global Value funds, Daniel O’Keefe, told the FT: “The company basically imploded before Dave Lewis began a journey of simplifying, refocusing on the UK.
“The company basically imploded before Dave Lewis began a journey of simplifying, refocusing on the UK. We just don’t understand, in a business as fragile as retail, why on earth would we risk distracting ourselves from that huge goal”
Daniel O’Keefe, Artisan Partners
“We just don’t understand, in a business as fragile as retail, why on earth would we risk distracting ourselves from that huge goal.”
A Tesco spokesman said the business remained confident the deal would “enhance” its recovery plans.
He said: “We always listen closely to the view of our shareholders. We have had a wide series of meetings over the last two months and are pleased with the overall response.
“We have been working on the transaction for over 12 months and believe the strategic and financial rationale is compelling. We are confident that it will enhance our recovery plans for Tesco and deliver substantial benefits to customers and shareholders.
“Since announcing the transaction, the majority of our top 10 shareholders have chosen to increase their shareholding in Tesco and we hope to convince all our shareholders of the merits of the transaction.”
Separately, Tesco Stores Ltd has agreed to pay a £129m fine to the Serious Fraud Office in the wake of its accounting scandal.
The supermarket giant revealed that it has reached a Deferred Prosecution Agreement with the SFO in relation to false accounting between February 2014 and September 2014.
The irregularities in the grocer’s balance sheet, which were uncovered by a whistleblower shortly after boss Dave Lewis took the helm, saw it overstate its profits by £326m.
The DPA relates to false accounting by Tesco’s subsidiary, Tesco Stores Limited, which will now seek final judicial approval to the DPA from the court on April 10.
Tesco Stores Limited will not be prosecuted, provided the business fulfils certain requirements, including payment of the £129m penalty.
The settlement relates to shops arm Tesco Stores, not the wider group and it is not an admission of criminal liability. It needs to be approved by Lord Justice Leveson next month.
“We sincerely regret the issues which occurred in 2014 and we are committed to doing everything we can to continue to restore trust in our business and brand”
Dave Lewis, Tesco
The supermarket giant has also agreed to a finding of “market abuse” from the Financial Conduct Authority for its trading statement in August 2014.
Tesco has established a compensation scheme for investors who bought shares or bonds between August 29 and September 19, with each net purchaser of shares entitled to compensation of 24.5p per share purchased, plus interest.
The total cost of the compensation to Tesco will be in the region of £85m, excluding interest.
Lewis said: “Over the last two and a half years, we have fully co-operated with this investigation into historic accounting practices, while at the same time fundamentally transforming our business.
“We sincerely regret the issues which occurred in 2014 and we are committed to doing everything we can to continue to restore trust in our business and brand.”