So secretive were Tesco and Booker during months of takeover talks that an analyst called their £3.7bn deal “one of the corporate surprises of the retail century so far”. Retail Week claimed their skilful subterfuge “left many a retailer, analyst and journalist in a state of stunned silence”.
According to The Times, the key conspirators had “spent a year secretly plotting”. And the Guardian could barely contain itself when hedge fund managers were caught cold — and short — by the announcement.
One can only imagine the delight on the part of Tesco’s Dave Lewis and Booker’s Charles Wilson that no one cracked their ingenious code names: Teal and Blue. Or was it Blue and Teal? Who knows.
Either way, by not talking to anyone, remaining tight-lipped, keeping schtum and keeping Mum, they kept the rest of the City in the dark. They were both rewarded with the media’s grudging admiration and a substantial intraday share price rise.
Today, though, the opposite is likely to prove true. Because it now appears that among those they chose not to talk to, to whom their lips remained sealed, and toward whom they remained both schtum and Mum were Tesco’s third and fourth largest shareholders.
Both Schroders and Artisan Partners have now publicly called for the deal to be scrapped, complaining that Tesco refused talk to them about concerns over shareholder value. Although another 12 of the top 20 shareholders seem supportive, Tesco’s unwillingness to talk looks careless, especially when the discussion points are well known.
Valuation was always going to be an issue, given that Tesco is proposing to pay about 23 times Booker’s 2017 earnings.
While the 12 per cent premium that its bid represented to Booker’s undisturbed share price could be justified by promising £175m of annual cost savings, that earnings multiple remains historically high. Just six years ago, Booker traded on nearer 15 times.
Schroders, in a letter to Tesco chairman John Allan, points out that Booker’s profits and margins are at their highest ever levels “which will make creating shareholder value extremely challenging”.
Tesco’s strategy was also debatable — but evidently not for debate. Moving into food wholesale offers only the opportunity to merge supply chains and logistics, delivering annual synergies of just 0.3 per cent of combined sales.
Schroders says it wanted the opportunity to question these limited margin opportunities and the questionable timing, in the middle of Tesco’s own turnround plan, which it had supported.
However, the most worrying suggestion is that Tesco chose winning the communications battle rather than winning people over. In December, with the deal still under wraps, senior independent director Richard Cousins resigned in silent protest.
At the time, Tesco kept the reason quiet, but Schroders is far from taciturn: “This demonstration of integrity delivers a powerful message about his concerns around the merits of the deal.”
It would appear that Tesco has not wasted words on winning over the unconvinced. When news of the deal broke, that surprised analyst said it felt like one “engineered by investment bankers rather than respective management or shareholders”.
Schroders and Artisan have shown what can happen if a management won’t tell shareholders otherwise. Silence can be anything but golden.
Babcock and bull story
There is surely no mess worse than a nuclear mess. So quite how Babcock has now emerged from not one, but two, smelling of roses (and not setting off the Geiger counter) is something of an achievement.
Back in January, reports of a wayward Trident missile test firing from a navy submarine had all eyes searching for a dummy warhead and a company to blame. But contractor Babcock, being responsible only for propelling the missile out of the water — and not the land mass that it might later mistakenly head for — found itself in the clear.
Then, on Monday, its contract to clean up 12 of Britain’s old 1960s Magnox nuclear reactors — won via its majority owned Cavendish Fluor Partnership — was cut short by nine years.
But, again, Babcock, being not responsible for the Nuclear Decommissioning Authority’s apparently flawed procurement process, emerged largely unscathed.
Although it will lose about £800m from its £20bn forward order book, the revenue hit is only £100m from 2020-21, which industry observers suggested it could make up elsewhere.
Chief executive Archie Bethel even hinted at one possible source: “We have developed a good working relationship with the NDA and we look forward to working with them, not only to bring this contract to an orderly end in two and a half years’ time but also on future projects, including the completion of the decommissioning of the Magnox power stations.”
It seems cleaning up nuclear mess is nice work if you can get it — twice.