When companies make acquisitions, there is plenty that can go wrong: the company can often take longer to merge into the parent; management can overpay should a rival company decide that it likes the idea of buying growth on the open market, too; worse still, management can take their eye off the ball, causing normally avoidable problems to occur at the company making the acquisition.
In short – investors need to tread carefully when acquisitions are announced.
So when Booker (LSE: BOK) announced its results and the acquisition of Musgrave Retail Partners GB Limited, which comprises the Budgens and Londis businesses, for £40m in cash last Thursday, investors marked the shares up 10%. This says two things to me:
- Booker has paid a good price for the business;
- The market believes that Booker’s management team is very capable of turning this (currently loss-making) business around.
Let’s have a look at the deal itself, together with the rationale behind it…
Price Is What You Pay…
Booker paid £40 million on a “cash free/debt free basis” with a normalised level of working capital – in essence, it is starting with a level playing field. Interestingly, Booker used to own Budgens, but sold it in 1982 for £82 million.
Londis started life as a mutual, and got going in the 1950s – it was brought into the Musgrave fold in 2004.
The most recent figures show that, between them, they made a loss of £7.3 million on turnover of £833 million.
Whilst this doesn’t sound like a business that you would want to stump up your hard-earned cash for, there’s a bit more to it than that.
Value Is What You Get….
By joining forces with Booker’s current franchise operations, mainly in the form of Premier, the group will almost double the size of its operation, giving it a market share of around 9.4%. In addition, it says that it will help independents compete with the multiple convenience stores – leading to better choice (e.g. fresh), prices and service.
The geographical and consumer profiles of the businesses are complementary and, together, Booker believes that they will help the retailer improve sales to the consumer.
Interestingly, the deal includes the Budgens and Londis supply chain – this can also serve Premier and independent retailers, improving utilisation and saving costs. Additionally, it provides Premier/Booker help with chilled ranges, whilst Budgens and Londis can benefit from a better local and national supply chain, with improved availability, choice and service.
To me, this deal seems to benefit all concerned and, importantly, is a direct attempt to take on the other players in the grocery and convenience market, currently estimated to be worth £37.4 billion in 2014 (+5.2% on 2013). This is where the growth is currently. Perhaps unsurprisingly, multiple retailers and discounters have increased space by 37% since 2007 — One Stop, Tesco Express, Coop, Sainsbury’s Local, Asda, Waitrose and other multiples expanding their convenience operations — One Stop (part of Tesco (LSE: TSCO) is becoming a franchise business, too.
Which One Should You Buy?
Turning to the chart covering the last 12 months, it is clear which share you should have bought. As we know, however, the stock market is all about the future – what will the next 12 months bring?
For my money, both J Sainsbury (LSE: SBRY) and Tesco have their work cut out – they need to fix their retail operations. This, amongst other things, has caused them to focus on their balance sheets, one of the results of which is a dividend cut at Sainsbury’s (and Tesco famously cancelled its final dividend).
Booker, on the other hand, has proved adept at turning around failing businesses – it finished the year with a £147 million cash balance, allowing it to increase the dividend by over 14% and pay a further capital return of 3.5 pence per share. This is also expected to be repeated next year.
Whilst I would be the last person to write off any of the supermarkets, I wouldn’t be a buyer of the shares currently. I would, however, be looking to pick up some shares in Booker on weakness as part of a diversified income portfolio.
