TSCDY Tesco PLC (PK)

By Ian Walker 

LONDON-- Tesco PLC's Friday agreement to buy Booker Group PLC for GBP3.7 billion ($4.66 billion) combines the U.K.'s largest retailer with its largest food wholesaler, in a surprise deal that the supermarket chain expects to bring major cost savings.

Tesco shares were up 8.5% on the news in morning trading in London, while Booker gained 16%.

Tesco billed the acquisition--its largest ever in the U.K.--as catapulting it from the country's biggest supermarket chain to its biggest food business, giving the grocer access to the market for eating out, worth an estimated GBP85 billion a year.

The supermarket chain will gain access to Booker's more than one million customers--which it serves through delivery and cash-and-carry--including restaurants, pubs, movie theaters and convenience stores. It said British consumers would see more fresh food available at more outlets while its customers would have access to 8,000 more locations to pick up their click-and-collect orders.

The deal is Tesco's first acquisition under Chief Executive Dave Lewis, a former Unilever PLC executive who took the helm in 2014 as Tesco was struggling through an accounting scandal and losing market share to newly aggressive discounters Aldi and Lidl.

Mr. Lewis has since been focused on turning around Tesco's U.K. performance by cutting prices, adjusting its range and improving customer service. Far from being in acquisition mode, Tesco retrenched from a variety of businesses and big markets as it worked to improve its performance at home. The supermarket chain sold garden-center chain Dobbies, coffee chain Harris + Hoole and Giraffe restaurants, among other noncore businesses, and sold its Turkey and South Korea units.

Friday's deal--along with the announcement that Tesco will restart paying dividends in fiscal 2018, after suspending them for the past two years--was seen by some analysts as a sign that the once-troubled grocer has turned a corner. But others noted that stiff pricing competition and sluggish revenue growth had translated into an urgent need for retailers to cut costs, motivating Tesco's acquisition of Booker.

"We read this as a clearly a defensive move in an increasingly tough U.K. trading environment," said Société Générale analyst Arnaud Joly.

The deal wasn't without controversy. Mr. Lewis admitted that the abrupt resignation of its senior independent director, Richard Cousins, earlier this month was motivated by Mr. Cousins's reservations about the acquisition.

Tesco and Booker first began talking about working together a year ago, according to Mr. Lewis, who knew Booker CEO Charles Wilson from his time at Unilever. The companies eventually decided that a Tesco acquisition of Booker was the best way to tap growth opportunities. Mr. Wilson will join Tesco's board and executive committee once the deal closes.

The acquisition will need approval from the U.K. Competition and Markets Authority, which likely will require some convenience-store closures. The companies have an estimated 10% share of the U.K. convenience market. Shore Capital analyst Clive Black said the regulator could make closing the deal difficult.

Booker shareholders will get 0.861 new Tesco shares and 42.6 pence in cash for each share held, giving them about a 16% share of the combined company. Tesco said the cash-and-share deal would deliver at least GBP175 million of cost savings, partly through procurement and distribution. Revenue synergies will be at least GBP25 million a year.

Ian Walker contributed to this article.

Write to Ian Walker at ian.walker@wsj.com

(END) Dow Jones Newswires

January 27, 2017 07:03 ET (12:03 GMT)

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