Announce in haste, approve at leisure.
The lengthy process of assessing whether Tesco Plc and Booker Group Plc's 3.6 billion-pound ($4.5 billion) merger is bad for competition is poised to kick off in the coming months.
Both companies are confident their strategic masterstroke will eventually be approved by the Competition and Markets Authority (CMA), and there are grounds to think their optimism is justified. But when you have Britain's biggest grocer lobbying to expand even more, clearance won't be a cake walk.
First the good news: the combined company's bigger buying power should mean cheaper prices, and better products, for both Tesco's customers and those independent retailers supplied by Booker (known as symbol groups). These corner shops are often pricey, so the merger might help here. And if such store operators don't like being supplied by a Tesco-owned business, they can switch to another buying group, such as Nisa AS, Spar Group Ltd. or Costcutter.
The last significant supermarket merger inquiry was in 2003, when Wm Morrison Supermarkets Plc agreed to buy bigger rival Safeway for 3 billion pounds. The industry's changed a lot since then: German discounters Aldi and Lidl now have a combined U.K. market share that's bigger than Morrison's. This offers some counterweight to Tesco's might, which might play into its hands.
It's against this backdrop that the CMA will assess some key implications of the deal. One of these is the impact on the supply chain, where the landscape has also changed since Morrison bought Safeway. There's now an ombudsman charged with ensuring that Britain's big supermarket chains don't abuse their suppliers. This check on Tesco's dominance should also help with the approval process.
Tesco's share of U.K. grocery market: 28%
But the store bases are a thornier matter, and could throw up some barriers to regulatory approval.
Tesco and Booker insist they are in very different areas of the market. Although both operate convenience stores, Tesco does this through the ownership of its namesake supermarkets and the One Stop chain. Booker supplies symbol groups, including Premier and Londis, as well as Budgens.
The issue is the level of influence that Booker has over the independent retailers it supplies. If the regulator judges Booker exerts significant control, then the picture for competition in the U.K. might be more ominous. And as Tesco has nearly a 28 percent market share, the CMA is likely to take a cautious approach, with remedies to match.
Even so, some of the ways this could play out may amount to no more than a flesh wound for Tesco.
The first would be for it to sell One Stop. Its sales and profits are similar to those of listed rival McColls Retail Group Plc, which has an enterprise value of about 250 million pounds. A disposal wouldn't be a great loss to Tesco, since One Stop generated sales of just under 1 billion pounds in 2016, compared with Tesco's U.K. sales of 37.2 billion pounds in the same period.
Another concession might be limiting growth in Tesco's convenience stores. This would be more painful, particularly as rival J Sainsbury Plc will still be free to expand. But Tesco could console itself with the fact that the convenience store market is probably close to saturation anyway.
Although this might dent the combined group's buying power, a big part of the strategic rationale is access to the fast-growing out-of-home dining market. That wouldn't be changed by some store rationalizations.
The competition inquiry is likely to be a drawn out affair. But with some Tesco shareholders already unhappy with the deal, for both companies, getting it over the line with as few nasties as possible from the competition authorities will be top of their shopping list.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.