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Tesco Plc,, the U.K.'s largest grocer, a faces a potential roadblock to its proposed 3.7 billion pound ($4.75 billion) purchase of the country’s largest wholesaler, Booker Group plc.
The U.K.'s Competition and Markets Authority (CMA) announced an initial investigation into the merger on May 30. Through July 25, CMA will assess whether the deal could reduce competition and choice for shoppers and other stores Booker currently supplies, the watchdog said.
Tesco CEO Dave Lewis says the strategic, largely vertical deal would further enhance the company’s growth prospects. Shareholders and U.K. authorities aren’t as sure the troubled company—recovering from a fine in April for overstating profits—should increase its already dominant market position.
Tesco is by far the leading supermarket chain in the U.K., with market capitalization, at $19.7 billion, more than twice the next largest competitor, Sainsbury PLC, at almost $8 billion.
The parties say they plan to close the deal in late 2017 or early 2018.
Tesco owns over 3,500 stores in the U.K. according to the company’s website. Its stores are “within easy reach of 95 percent of the population,” according to company filings. Booker operates another 5,400 stores, mostly convenience stores, under various brands.
The deal would move Tesco from its current large grocery store market further into smaller convenience formats. It would provide an expanded network of up to 8,000 “neighborhood locations to pick up ‘click and collect’ orders,” the retailer said in filings.
The merger would also give Tesco access to Booker’s rapidly growing food service arm, which supplies the “out of home” food market, according to Bloomberg Intelligence Senior Industry Analyst Charles Allen.
“In home” consumption in the U.K. is “significant and stable, but the eating out market continues to grow and evolve, with delivery and convenience becoming increasingly important to business customers and consumers,” Tesco said in a regulatory filing.
Allen places the merger in a longer trend of grocers buying food service companies in search of such synergies. In January, he compared the deal to Ahold NV’s purchase of U.S. Food Service for $2.68 billion in 2000 and Colruyt Group’s series of small deals to move from its native Belgium into the food service market in France.
If the CMA identifies competitive problems, it can refer the tie-up to an in-depth investigation that can last for 24 weeks, costing the parties time and money. During that time, the parties can submit proposed remedies to the problems the CMA identifies, often in the form of divestitures or market concessions.
A public comment period on the potential impacts of the deal runs through June 13.
The official investigation is not the only headwind the merger faces. Schroders Plc and Artisan Partners Asset Management Inc., which together own 9 percent of Tesco, said that they want the grocer to focus on recovering from a recent serious accounting scandal rather than expanding into new business areas, according to Bloomberg News.
Tesco paid a 129 million pound fine to the U.K.'s Serious Fraud Office for overstating its 2014 profits in April 2017. The company also is turning around operations from a record loss in 2015.
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