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Grocer Tesco’s (TSCO) £3.7bn acquisition of food wholesaler Booker (BOK) sees the latter’s shares +15% this morning This is understandable as prey shareholders are traditionally paid a premium to cede control. However, it is the former’s share price reaction that is garnering most attention; +10.5%. Predator shares typically fall as the company shells out cash (42.6p/share in this case), takes on more debt and/or issues new shares (0.681 new TSCO shares for each BOK) that is dilutive for existing shareholders. Booker shareholders are set to own 16% of the newly combined company (Tescooker? Besco?).
TSCO shares appear to be rallying on the premise that the new group can reinforce it’s #1 Grocer slot by becoming the UK’s leading food business, boosting profits by £25m annually thanks to better growth (out-of-home growing faster; wider food sales audience) and sizeable synergies (supply chain, admin; £175m p.a). However, it could also be the long-awaited good news that dividends are set to return in full year 2017/18 after a 2-year enforced hiatus due to an accounting scandal that saw it record one of the biggest losses in UK corporate history. Hopes of a return to a 4% yield are perhaps reviving interest that the newly combined and faster-growing operation can help propel the shares back towards 300p. Both shares are trading highs of the day and still rising.
Mike van Dulken, Head of Research, 27 Jan
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