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 Bookers management team is very capable of turning this (currently loss-making) business around.
Lets 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 isstarting 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 doesnt sound like a business that you would want to stump up your hard-earned cash for, theres a bit more to it than that.
Value Is What You Get.
By joining forces with Bookers 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, itsays that itwill 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, Bookerbelieves 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 concernedand,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, Sainsburys 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 Sainsburys (and Tesco famously cancelled its final dividend).
Booker, on the other hand, hasproved adept at turning around failing businesses itfinished the year with a 147 million cash balance, allowing itto 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 wouldnt 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.
Should you be an investor with an eye on income and want to avoid your fingers being cut by this and other falling knives, take a look at this report containing The Motley Fool’s very own Mark Rogers’Five Golden Rules for Building a Dividend Portfolio, within this special free report entitled:“How To Create Dividends For Life”
This report will show you how to tailor your portfolio, allowing you to ‘Dividend and Conquer’ — and lay the foundations of a more dependable income-focused portfolio. It’s currentlyFREE and comes without obligation. So, sit back in your favourite chair,click hereand enjoy!
Dave Sullivan owns shares in Booker. The Motley Fool UK has recommended Booker. The Motley Fool UK owns shares of Tesco. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.