Tesco's acquisition of Booker could face serious scrutiny from competition watchdog

Tesco, Britain’s biggest supermarket group, is to buy Booker, the UK’s largest food wholesaler, in a £3.7 billion deal.

The companies claim that the deal will “bring benefits for consumers, independent retailers, caterers, small businesses, suppliers and colleagues, as well as delivering significant value to shareholders.”

The UK competition watchdog, the Competition and Markets Authority (CMA), may take a different view. The deal is likely to raise questions over its impact on competition in the UK’s grocery sector. Osborne Clarke competition expert Marc Shrimpling has identified three particular issues which may cause the CMA some concern:

• The head-to-head issue:  Booker owns convenience stores Londis and Budgens and there could be a large number of local areas around the UK where these stores compete head-to-head with existing Tesco Express/Metro stores. In order to prove that local competition will not be significantly affected by the deal, Tesco may be obliged to divest some of the acquired stores in these overlapping areas. The degree of risk here will depend on the actual geographic overlaps, and on the extent of Booker’s “control” over the Londis and Budgens stores, given that the stores are operated by franchisees, albeit supplied primarily by Bookers.
• The vertical supply chain issue:  Booker, as a wholesaler, may be an important supplier to certain convenience and other grocery stores. Accordingly, the CMA will be keen to understand whether, post-acquisition, Tesco could have a real incentive to increase prices and/or decrease the quality of these wholesale services, with a view to boosting the relative popularity of Tesco’s competing retail stores.
• The buyer power issue:  It is possible that many food and drink producers – not least in the UK farming industry – will be quick to oppose the deal if they feel that Tesco’s bargaining power will increase markedly as a result of this consolidation.

Ultimately, this could be a situation where the CMA decides an in-depth (Phase II) assessment is required before it reaches a final verdict. This outcome would cause significant delay to the completion timetable (a Phase II assessment will take at least six months on top of the 40 day Phase I review) and may result in Tesco being obliged to give a range of concessions in order to get the deal through. Much will depend on the extent to which convenience store retailers that currently depend on Booker as a primary supplier raise grievances and concerns.