March 27, 2017 / 9:31 PM / 4 months ago

Big Tesco shareholders oppose $4.7 billion Booker deal

A company logo is pictured outside a Tesco supermarket in Altrincham northern England, April 16, 2016.Phil Noble/File Photo

LONDON (Reuters) - Two of Tesco Plc's (TSCO.L) biggest shareholders have called on the supermarket group to withdraw its 3.7 billion-pound ($4.7 billion) agreed offer for wholesaler Booker Group Plc (BOK.L), potentially casting doubt on the deal's progress.

Schroder Investment Management (SDR.L) and Artisan Partners, Tesco's third and fourth largest investors with stakes of 4.49 and 4.48 percent respectively, both said on Monday they were against the transaction.

In a letter to Tesco Chairman John Allan, Schroders fund manager Nick Kirrage and the asset manager's global head of stewardship Jessica Ground called on investors who share their view to speak out against the deal announced on Jan. 27.

"All management teams believe that their acquisitions will create value. However, there is compelling academic and empirical evidence that, on average, acquisitions destroy value for acquiring shareholders," they wrote in the letter, seen by Reuters.

"We believe that the high price being paid for Booker makes the destruction of value even more likely."

In response Tesco said the strategic and financial rationale of the deal remained compelling and it was pleased with the overall response of investors from its own soundings over the last two months.

"Since announcing the transaction the majority of our top 10 shareholders have chosen to increase their shareholding in Tesco and we hope to convince all our shareholders of the merits of the transaction," said a spokesman.

Distraction

Daniel O'Keefe, lead portfolio manager of Artisan's Global Value funds, told Reuters buying Booker was a distraction for Tesco's management and a risk not worth taking.

"Booker is a new business for Tesco, it's going to involve a lot of distraction for management, unforeseen risk, and unforeseen issues," he said.

A branded sign is displayed outside of a Booker Wholesale store in London, Britain January 27, 2017.Neil Hall

O'Keefe said Artisan had expressed its concern over the merits of the deal to Tesco management.

"They are still in favour of the transaction; we're not," he said.

Tesco would need a majority of its shareholders to back the deal at a meeting for it to go ahead.

The stances of Schroders and Artisan were first reported by the Financial Times.

Richard Cousins, CEO of Compass Group Plc (CPG.L), the world's biggest catering firm, resigned as Tesco's senior independent director on Jan. 3 because he did not support the deal.

"This demonstration of integrity delivers a powerful message about his concerns around the merits of the deal," said Schroders.

By buying Booker, Tesco is looking to increase its exposure to Britain's 85 billion pound "out of home" food market, including cafes, restaurants and takeaways, which is growing at a greater pace than the 110 billion pounds "eat at home" market.

Share prices in both companies rose sharply when the deal was announced. However, Tesco's shares have since fallen on concerns the deal faces a lengthy competition investigation.

Tesco shares are down 8 percent so far this year while Booker's are up 14 percent.

Though Tesco and Booker maintain they have a compelling competition case the deal is expected to face intense scrutiny from Britain's antitrust authorities as it will add to Tesco's more than 28 percent share of the overall UK grocery market and, more specifically, its influence in the convenience, confectionery and tobacco markets.

($1 = 0.7961 pounds)

Additional reporting by Rachel Armstrong; Editing by David Clarke and Lisa Shumaker

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