The boards of Tesco PLC (LON:TSCO), the UK’s leading food retailer, and Booker Group plc (LON:BOK), the UK’s leading food wholesaler, have today announced that they have reached an agreement on the terms of a recommended share and cash merger (the “Merger”) to create the UK’s leading food business.
The Combined Group will bring benefits for consumers, independent retailers, caterers, small businesses, suppliers, and colleagues, as well as delivering significant value to shareholders.
The Combined Group will be well placed to serve the large, established ‘in home’ food market as well as the faster growing ‘out of home’ food market. By bringing together Tesco and Booker’s retail and wholesale expertise, supply chain and digital capabilities, the Combined Group will be able to provide greater choice, quality, price and service in the food market, whilst improving efficiency and reducing food waste. The Combined Group will bring together the capacity and capability to generate new growth and deliver significant revenue and cost synergies.
The Merger is expected to:
· delight consumers with better availability of quality food at attractive prices across retail and eating out locations;
· serve better the faster growing ‘out of home’ food market;
· help independent retailers, caterers and small businesses by further improving choice, price and service, with enhanced digital and delivery service options;
· present a broader market opportunity for our suppliers, with strong growth prospects and a clear opportunity to develop better own brand and fresh ranges;
· cut food waste and increase efficiency by creating a broader, multi-channel partner who can work with producers across their full agricultural crop;
· create significant opportunities for synergies whilst retaining market-leading retail and wholesale expertise; and
· create attractive innovation opportunities to serve customers and consumers better in a rapidly evolving market place.
Commenting on today’s Announcement, Dave Lewis, Chief Executive Officer of Tesco plc said: “Tesco has made significant progress in turning around our UK retail business. 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. Wherever food is prepared and eaten – ‘in home’ or ‘out of home’ – we will meet this opportunity with the widest choice and best service available.”
Commenting on today’s Announcement, Charles Wilson, Chief Executive Officer of Booker Group plc said: “Booker is committed to improving choice, prices and service for the independent retailers, caterers and small businesses that we are proud to serve. We believe that joining forces with Tesco offers the potential to bring major benefits to end consumers, our customers, suppliers, colleagues and shareholders.”
Summary
· Under the terms of the Merger, each Booker Scheme Shareholder will receive:
for each Booker Scheme Share: 0.861 New Tesco Shares; and 42.6 pence in cash
· Based on the Closing Price of 189.0 pence per Tesco Share on 26 January 2017 (being the last Business Day before the date of this Announcement), the terms of the Merger represent:
· a value of approximately 205.3 pence per Booker Share;
· a value of approximately £3.7 billion for Booker’s ordinary share capital; and
· a premium of approximately 12 per cent. to the Closing Price of 183.1 pence per Booker Share on 26 January 2017, being the last Business Day prior to this Announcement.
· The Merger represents:
· a premium of approximately 15 per cent. based on the volume weighted average share prices of Booker and Tesco since 12 January 2017, being the date on which Booker and Tesco published their Christmas trading updates; and
· a premium of approximately 24 per cent. based on the three month volume weighted average share prices of Booker and Tesco.
· The Merger will result in Booker Shareholders owning approximately 16 per cent. of the Combined Group (based on the existing issued ordinary share capital of Tesco and Booker) and sharing in the benefits accruing to the Combined Group via attractive growth prospects and the realisation of significant revenue and cost synergies.
· Opportunities for revenue and cost synergies have been identified which support the significant shareholder value creation opportunity of the Merger. The Tesco Board expect pre-tax synergies for the Combined Group to reach a run-rate of at least £200 million per annum by the end of the third year following completion of the Merger. Quantified revenue synergies of at least £25 million per annum are anticipated to come by the end of the third year following completion of the Merger, primarily from an enhanced offering and customer proposition. The Tesco Board also believes that there is significant opportunity for further revenue synergies which have not been fully quantified for reporting under the Code at this stage. The Merger is also expected to enable opportunity for cost synergies of at least £175 million, mainly in areas such as procurement and distribution.
· Booker’s Chief Executive Officer will join the Combined Group’s Board and Executive Committee and Booker’s Chairman will also join the Combined Group’s Board.
Financial Benefits and Effects
· The shareholders of the Combined Group will benefit from a leading market position in both the ‘in home’ food market and the faster growing ‘out of home’ food market. In addition, the Merger will combine Tesco and Booker’s capabilities and skills and provide a platform for substantial growth and to realise revenue and cost synergies.
· The Merger is expected to:
· generate a Return on Invested Capital in excess of Tesco’s cost of capital in the second full financial year following the Effective Date, and significantly in excess of Tesco’s cost of capital in the third full financial year as the synergy benefits are delivered;
· be accretive to Tesco’s earnings per share (excluding the effects of implementation costs) in the second full financial year following the Effective Date; and
· be beneficial to Tesco’s leverage metrics.
Tesco Dividend Policy and Booker Dividends
· Reflecting Tesco’s improved performance and the Tesco Board’s confidence in its future prospects, the Tesco Board has reviewed its dividend policy and intends to recommence paying dividends in respect of the financial year 2017/18. The Tesco Board expects dividends to grow progressively from that financial year with the aim of achieving a target cover of c.2x earnings per share over the medium term.
· Tesco and Booker have agreed that Booker Shareholders will be entitled to receive: (i) any ordinary interim and final dividends announced, declared or paid by Booker in the ordinary course, in a manner consistent with past practice, and with a record date falling prior to the Effective Date; and (ii) a special dividend in respect of the financial year ending 24 March 2017 which Booker intends to pay in lieu of the annual B share scheme (as stated in Booker’s interim results announcement on 13 October 2016), in each case as described in Appendix 7. In addition, Booker Shareholders will also be entitled to receive a Closing Dividend soon after the Effective Date, as described in Appendix 7. This dividend will reflect the principle agreed between Tesco and Booker that Booker Shareholders should receive a dividend payment equal to the accrued but unpaid ordinary dividends that they would otherwise have expected to receive as a Booker Shareholder in respect of the period from the end of the last financial period for which a dividend was announced, made, declared or paid until the Effective Date, such payment to be reduced by any dividends that a Booker Shareholder would be expected to become entitled to receive as a holder of New Tesco Shares after the Effective Date in relation to the same period. Appendix 7 sets out further details of the dividend entitlements of Booker Shareholders.
· The rights of holders of B Shares issued by Booker on 18 July 2016, who elected for the deferred redemption option set out in the B Share Scheme Circular, will not be impacted by the Merger and the B Shares will be redeemed on or around 27 April 2017, as per the indicative timeline set out in the B Share Scheme Circular (the “2017 B Share Redemption”).
· If Booker announces, declares, makes or pays any dividend or other distribution on or after the date of this Announcement and prior to the Effective Date, other than the Permitted Booker Dividends or 2017 B Share Redemption, or in excess of the Permitted Booker Dividends or 2017 B Share Redemption, Tesco reserves the right to reduce the amount of cash payable and the number of New Tesco Shares to be issued to each Booker Shareholder in respect of each Booker Share so as to reflect the value attributable to any such dividend or such excess.
Merger Details
· On completion of the Merger, Charles Wilson, Booker’s Chief Executive Officer and Stewart Gilliland, Booker’s Chairman, will join the Combined Group’s Board. Charles Wilson will also join the Combined Group’s Executive Committee.
· It is intended that the Merger will be implemented by means of a Court-sanctioned scheme of arrangement under Part 26 of the Act, further details of which are contained in the full text of this Announcement. However, Tesco reserves the right to implement the Merger by way of a Takeover Offer, subject to the Panel’s consent and the terms of the Co-operation Agreement.
· Tesco will provide a Mix and Match Facility, which will allow Booker Shareholders to elect, subject to off-setting elections made by other Booker Shareholders, to vary the proportion in which they receive New Tesco Shares and cash. The Mix and Match Facility will not change the total number of New Tesco Shares to be issued or the maximum amount of cash that will be paid under the terms of the Merger.
· Elections made by Booker Shareholders under the Mix and Match Facility will be satisfied only to the extent that other Booker Shareholders make off-setting elections. To the extent that elections cannot be satisfied in full, they will be scaled down on a pro rata basis.
· In connection with the Mix and Match Facility, Charles Wilson, the Chief Executive Officer of Booker has irrevocably undertaken to elect to receive 100 per cent. New Tesco Shares in respect of his entire holding of Booker Shares, subject to the elections of other Booker Shareholders.
· Charles Wilson has also entered into the Lock‑up Agreement pursuant to which he has agreed not to (subject to certain customary carve-outs) dispose of his current holding of 24,533 Tesco Shares and the New Tesco Shares he will receive pursuant to the Merger without Tesco’s consent during the lock-up period of five years from the Effective Date.
· The Booker Directors, who have been so advised by J.P. Morgan Cazenove as to the financial terms of the Merger, consider the terms of the Merger to be fair and reasonable. The Booker Directors intend unanimously to recommend that Booker Shareholders vote in favour of the Scheme at the Scheme Court Meeting and the resolutions relating to the Merger at the Booker General Meeting as they have irrevocably undertaken to do in respect of their own holdings of, in aggregate, 120,555,793 Booker Shares representing approximately 6.8 per cent. of the existing issued ordinary share capital of Booker on 26 January 2017, being the last Business Day before the date of this Announcement. In providing its advice, J.P. Morgan Cazenove has taken into account the commercial assessments of the Booker Directors.
· The Merger constitutes a Class 1 transaction for Tesco for the purposes of the Listing Rules. Accordingly, the Merger will be conditional on the approval of the Tesco Shareholders at the Tesco General Meeting.
· The Tesco Directors consider the Merger to be in the best interests of Tesco and the Tesco Shareholders as a whole and unanimously intend to recommend that Tesco Shareholders vote in favour of the Tesco Resolutions to be proposed at the Tesco General Meeting which will be convened in connection with the Merger, as all Tesco Directors who hold Tesco Shares have irrevocably undertaken to do in respect of their own holdings of, in aggregate, 400,970 Tesco Shares representing approximately 0.0049 per cent. of the existing issued ordinary share capital of Tesco on 26 January 2017, being the last Business Day before the date of this Announcement. In addition, all Tesco Directors who hold their Tesco Shares in the form of ADRs have irrevocably undertaken to vote in favour of the Tesco Resolutions to be proposed at the Tesco General Meeting in the event that their current holdings convert from the form of ADRs to Tesco Shares (and therefore become entitled to vote at the Tesco General Meeting), with such undertakings relating to, in aggregate, 277,200 Tesco Shares representing approximately 0.0034 per cent. of the existing issued ordinary share capital of Tesco on 26 January 2017, being the last Business Day before the date of this Announcement.
· The Tesco Directors have received financial advice from Greenhill, Barclays and Citi in relation to the Merger. In providing their advice to the Tesco Directors, Greenhill, Barclays and Citi have relied upon the Tesco Directors’ commercial assessments of the Merger.
· The Merger is subject to, inter alia, the satisfaction or waiver of the CMA Pre-Condition set out in Appendix 1 to this Announcement and the Conditions set out in Appendix 2 to this Announcement. The Merger is also subject to the further terms set out in Appendix 2 to this Announcement and to the full terms and conditions which will be set out in the Scheme Document.
· The Scheme Document will contain further information about the Merger and notices of the Scheme Court Meeting and Booker General Meeting, and will specify the action to be taken by Booker Scheme Shareholders. It is expected that the Scheme Document will be despatched to Booker Shareholders together with the Forms of Proxy no later than 28 days after the date on which the CMA Pre-Condition is satisfied or waived, as applicable, save as the Panel may otherwise permit.
· It is expected that the Prospectus, containing information about the New Tesco Shares, will be published at or around the same time as the Scheme Document is posted to Booker Shareholders. It is also expected that the Circular, containing details of the Merger and notice of the Tesco General Meeting, will be posted to Tesco Shareholders at or around the same time as the Scheme Document is posted to Booker Shareholders, with the Tesco General Meeting being held at or around the same time as the Booker Meetings.
· The Scheme is expected to become effective in late 2017/early 2018, subject to the satisfaction or waiver of the CMA Pre-Condition set out in Appendix 1 to this Announcement and the Conditions set out in Appendix 2 to this Announcement.
This summary should be read in conjunction with, and is subject to, the full text of the following Announcement (including its Appendices). The Merger is subject to, inter alia, the satisfaction or waiver of the CMA Pre-Condition set out in Appendix 1 to this Announcement and the Conditions set out in Appendix 2 to this Announcement. The Merger is also subject to the further terms set out in Appendix 2 to this Announcement and to the full terms and conditions which will be set out in the Scheme Document. Appendix 3 to this Announcement contains the sources and bases of certain information contained in this summary and the following Announcement. Appendix 4 to this Announcement contains details of the irrevocable undertakings received by Tesco and by Booker. Appendix 5 to this Announcement contains the Tesco Quantified Financial Benefits Statement, together with the reports from Deloitte, Tesco’s reporting accountants, and Greenhill, Tesco’s lead financial adviser, as required under Rule 28.1(a) of the Code. Appendix 6 to this Announcement contains an outlook statement made by Tesco, together with the reports from Deloitte, its reporting accountants and Greenhill, Tesco’s lead financial adviser, as required under Rule 28.1(b) of the Code. Appendix 7 to this Announcement contains details of the dividend entitlements of the Booker Shareholders. Appendix 8 to this Announcement contains the definitions of certain terms used in this summary and the following Announcement.
For the purposes of Rule 28 of the Code, the Tesco Quantified Financial Benefits Statement contained in Appendix 5 to this Announcement and the Tesco Outlook Statement contained in Appendix 6 to this Announcement are the responsibility of Tesco and the Tesco Directors. Any statement of intention, belief or expectation for the Combined Group following the Effective Date is an intention, belief or expectation of the Tesco Directors and not of the Booker Directors.
