Sandell Encourages Booker Shareholders to Vote against Tesco’s Insufficient Offer. (“Sandell”), which holds a significant economic interest of 1.75% in Booker Group plc (“Booker” or the “Company”), this week sent a letter to Booker’s Board of Directors (“the Board”) expressing its concerns with the current Tesco offer.
Sandell believes that the current mechanism to pay only 65% of the FY2018 earnings as a closing dividend is unjustified. Given that the expected closing date of the deal coincides closely with Booker’s fiscal year end, Sandell would urge Booker to pay all of its FY2018 earnings to shareholders, in line with the FY2017 precedent of paying out 100% of earnings via the addition of a Special Dividend.
Further, in Sandell’s view, the current cash-and-stock consideration being offered by Tesco is insufficient for a number of reasons:Tesco stock is a poor currency. A substantial part of the consideration would be paid in Tesco stock. Although Tesco has made substantial progress over the past 12 months, Sandell continues to believe that Tesco stock is inferior to Booker stock. Tesco’s vulnerability to online competitors is highlighted by the significant volatility that was observed upon Amazon’s announcement of its purchase of Whole Foods. In addition, not only do Tesco shares pay a much lower dividend, but, as a company, Tesco has lower margins, higher capital intensity and lower returns on capital than Booker. While Tesco CEO Dave Lewis has achieved much during the past three years, the track record of the Booker management team is unmatched. Premium paid is below average. At the time of the deal’s announcement, the current transaction offered only a 12% premium for Booker shareholders. This is well below the average premium of approximately 25% for strategic acquisitions of UK PLCs over the past 10 years. Sandell notes that the deal was described as a “merger”. However, in Sandell’s opinion, this is not the case – Tesco seeks to acquire control of Booker and, as such, should pay a premium for control in line with these similar transactions. Synergies disproportionately accrue to Tesco shareholders. At the time of the deal’s announcement, the premium offered was approximately 22p per Booker share, equivalent to an equity value of approximately £400m. By contrast, the companies disclosed an expected £200m per annum of synergies by year three. After tax, the premium paid was just 2.7x the run-rate synergies – extremely low when compared to Tesco’s current P/E multiple of 19x and Booker’s current P/E multiple of 25x. Conservatively applying the lower Tesco multiple to these synergies, and assuming that 50% of the synergies should accrue to Booker shareholders, this would imply a premium of approximately 77p per share, or a consideration value of 260p per share based on an unaffected share price of 183.1p.
Furthermore, it cannot be assumed that all Booker shareholders will be able to participate in future synergies through the Tesco shares that they will receive. First, Booker shareholders will collectively own only 16% of the combined entity. Second, only the current value of the proposed consideration is relevant. Booker shareholders may wish to dispose of the Tesco shares they receive as consideration, especially if they do not regard Tesco shares as a sufficient substitute for standalone Booker shares and if Booker’s business represents a relatively small portion of Tesco’s business.The market has re-rated since the deal announcement. Since the announcement of the deal, the FTSE250 has risen 6%, while the value of the Tesco offer is down (2%) as Tesco has significantly underperformed the market during the past year. Booker traded at a 62% premium to the FTSE250 the day before the transaction was announced. Applying the same ratio to the current FTSE250 multiple results in a stock price of 214p per share, before any control premium for Booker is considered. Even if we were to assume a low 15% control premium, this gives a fair value of at least 246p per share. Booker earnings have grown. Prior to the deal’s announcement, Booker shares were valued at 26x P/E and 18x TV/EBITDA. Applying these multiples to Booker’s current earnings yields a per share value of approximately 230p before any control premium, or 265p with a 15% control premium. Booker shareholders deserve a premium for Tesco gaining a world-class management team. Upon completion of the transaction, both Booker's Chief Executive Officer and Chairman will join the Combined Group's Board. As well as joining the Combined Group’s Executive Committee, Mr Wilson, recently named Business Person of the Year, is to become CEO of Tesco’s retail and wholesale operations in the UK & Ireland. There is even press speculation that Mr Wilson is in line to become the next CEO of Tesco. Sandell believes that this highlights the quality of Booker’s management team and the additional value of taking Booker under Tesco’s control. Unfortunately, it does not seem to be accounted for in the current premium offered to Booker shareholders.
Sandell believes that a fair value of 255-265p per share is reasonable and well above the offer’s current market value. In addition, Sandell would expect approximately 8-9p of dividends to reflect Booker’s full-year 2018 earnings. While agnostic as to the mechanism by which shareholders receive the increased consideration, Sandell believes that one straightforward route would be to increase the Booker closing dividend to reflect the change in the market since the deal was announced.
Note that there is precedent for a bidder to raise its offer in the UK following a substantial change in the market. In 2016, for example, AB InBev raised its offer for SABMiller more than a year after the deal was first proposed when market valuations increased substantially. In that case, the parties raised the deal consideration despite AB InBev’s initial offer reflecting a more than 50% premium over the unaffected price. In Booker’s case, there is much more room for an increased offer given the relatively small premium offered in the first place.
Given that the market has re-rated, Sandell believes that the downside of walking away from the offer is limited. Sandell believes that it is likely many Booker shareholders share its view that the board should be seeking better terms for Booker shareholders given the material changes that have occurred in the market over the past 12 months.
This announcement is not intended to and does not constitute or form any part of an offer to sell or subscribe for or an invitation to purchase or subscribe for any securities or the solicitation of an offer to purchase or subscribe for any securities. In particular this announcement is not a “financial promotion” for purposes of the Financial Services and Markets Act 2000, nor a prospectus. Nothing in this announcement constitutes legal, tax, accounting, regulatory, investment or other advice of any kind to any person in any jurisdiction.
Certain statements in this announcement, including those regarding the possible or assumed future performance of the Company, its subsidiaries, investments or its industry or other trend projections may constitute forward-looking statements. By their nature, forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors which may cause actual results, performance or developments to materially differ from those expressed or implied by those forward-looking statements. Accordingly, no assurance is given that such forward-looking statements will prove to have been correct and any such statements speak only as at the date of this announcement and none of Sandell nor any of their respective affiliates or their respective officers, directors, employees, agents or professional advisers (all such persons together being “Relevant Persons”) undertakes any obligation to update these forward-looking statements after the date of this announcement, save to the extent required by applicable law. In particular, but without limitation, no representation or warranty is given by any of the Relevant Persons as to the achievability or reasonableness of, and no reliance should be placed on, any assumptions, targets, forecasts, projections or estimates with regard to anticipated future performance of the Company, its subsidiaries, investments or its industry.
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Notes to Editors
About Sandell Asset Management Corp.
Sandell Asset Management Corp. is a leading private, alternative asset management firm specializing in global corporate event-driven, multi-strategy investing with a strong focus on equity special situations and credit opportunities. Sandell Asset Management Corp. was founded in 1998 by Thomas E. Sandell and has offices in New York and London and a global staff of investment professionals, traders and infrastructure specialists.