Letter from the Artisan Partners Global Value Team to the Tesco PLC Board of Directors

SAN FRANCISCO and CHICAGO, Feb. 26, 2018 (GLOBE NEWSWIRE) -- On February 21, the Artisan Partners Global Value Team delivered the following letter to the Tesco PLC Board of Directors. The team has taken note of recent commentary from certain shareholder advisory firms and Booker Group PLC shareholders concerning Tesco’s offer to Booker to acquire all of Booker’s outstanding share capital. The team has further observed that Booker shareholder opposition has been led by merger-arbitrage hedge funds who have only recently acquired their Booker shares and for whom the enhancement of long-term value is unlikely their primary objective. In light of the foregoing, and in an effort to provide the perspective of a large, long-term Tesco shareholder, the team has determined to make public the contents of its letter to the Tesco board.

February 21, 2018

Board of Directors
Tesco PLC
Tesco House
Shire Park
Kestrel Way
Welwyn Garden City

To the Board of Directors of Tesco PLC:

On behalf of investment advisory clients in our Global Value and Non-U.S. Value investment strategies, we have been an investor in Tesco PLC (“Tesco”) since January, 2012. As of our most recent filing under Rule 8.3 of the Takeover Code, the client accounts we manage held approximately 4.6% of Tesco’s outstanding Ordinary Shares.

Over the last few weeks, we have watched with growing concern and disbelief as certain shareholder advisory firms and Booker Group PLC (“Booker”) shareholders have publicly opposed the proposed merger between Tesco and Booker. Based on the fundamentals of the proposed transaction, we believe that Tesco is overpaying for this transaction, not underpaying; therefore, we strongly encourage the Tesco board to refrain from increasing its bid for Booker and instead walk away from the transaction should it not achieve the requisite approval from Booker shareholders.

We believe the main arguments that have been put forth for why Booker shareholders should reject the transaction are intellectually flawed and opportunistic. Here is why we believe the Tesco board should ignore these arguments:

  1. Tesco is paying an insufficient premium. The financial merits of a transaction should be analyzed based on the absolute price offered, not on its relative level. As it stands, Booker shareholders are selling a business in a fairly mature market with low barriers to entry at approximately 25X earnings, which we view as an extremely generous transaction multiple. In addition, since Tesco is paying for much of the deal in undervalued Tesco stock, Booker shareholders will receive economics greater than the stated transaction price should the discount to intrinsic value unwind for Tesco shares. Viewed from this perspective, Booker shareholders are receiving a greater premium than what is stated by the headline transaction price and multiples.
  1. The transaction multiple is too low after synergies. It is Tesco, not Booker, that is enabling the vast majority of the synergies in this deal given Tesco’s market leading position in British food retail and its existing infrastructure. The procurement synergies mostly come from Tesco’s scale and supplier relationships. The distribution and fulfilment synergies largely come from Tesco’s existing footprint and capabilities. Tesco could leverage these attributes to drive synergies by merging with any wholesale player in the U.K; Booker has no other potential partner that can deliver the range and scale of benefits that Tesco brings to the table. Since Tesco is originating the lion’s share of the synergies, Booker has no right to demand more than the already generous allocation for synergy creation that has been given to Booker shareholders as part of the purchase price, especially since these synergies have yet to materialize.
  1. Booker’s earnings have grown in the past year, so Tesco should pay more. The high price Tesco agreed to pay for Booker in January 2017 was based on forecasts for Booker continuing to grow sales and profits for the foreseeable future. Booker’s continuation along this trajectory is not a new development but rather the expected outcome that was assumed when the deal was struck.
  1. Booker’s wholesale peers have increased in value, therefore Tesco should pay more. At the time the deal was agreed upon, both boards surely understood that the stock market value of either company or its peers could fluctuate. We sincerely doubt that Booker’s shareholders would be asking for less money if the stock market valuations of the peer group had declined! We see this as an opportunistic argument that runs counter to generally accepted codes of business conduct in the U.K. Moreover, the peer group against which Booker has been compared to form this argument is not an intellectually robust sample: neither Marr (operations mostly in Italy), nor Sligro (operations mostly in Holland), nor B&M (a general merchandise discount retailer) are true comparables for Booker. A more accurate assessment of what has happened to the value of Booker’s peers would be an analysis of Booker’s actual competitors in the U.K. This would include Palmer & Harvey, a firm that recently entered bankruptcy administration.
  1. The final dividend paid to Booker shareholders is too small. The quantum of the dividend paid out to Booker shareholders must be viewed within the context of the overall value given to Booker shareholders as part of the deal. Looking at a dividend payout in isolation serves no purpose.

We trust that you will keep in mind the best interests of Tesco shareholders as you consider the next steps to be taken with respect to the proposed Booker transaction. We would be happy to further discuss our thoughts regarding the proposed transaction with you at your convenience.


Daniel J. O’Keefe
Managing Director, Portfolio Manager

N. David Samra
Managing Director, Portfolio Manager

Justin Bandy
Associate Portfolio Manager

Artisan Contacts:
Mike Roos

JPES Partners
+44 (0)20 7520 7620

Source: Artisan Partners Asset Management Inc.