Takeovers and mergers: Wholesale Changes ahead for Booker & Makro

Here is a recent example of a classic horizontal integration. Two UK wholesalers - Booker and Makro are being brought together in a £139.7m takeover. A good example to use to help illustrate the concept of horizontal integration, although it is far to early (obviously) to know whether the combination of these two businesses will deliver shareholder value to the investors in Booker, who will take control of their small rival.

The key to analysing and evaluating takeovers that involve horizontal integration is to recognise the significant potential for cost synergies in such deals.

If you think it through, it ought to be obvious why cost synergies should arise. Two businesses competing in the same industry, often of similar size and scale, with similar organisational setups. There has to be potential to remove duplicated activities - which is a key source of cost synergies.

The key motive of the takeover for Booker is their corporate objective of becoming UK market leader in the wholesaling industry. According to Interactive Investor

“Through the proposed transaction, Booker said it is looking to become the UK’s leading wholesaler to caterers and retailers. Booker will take control of Makro UK’s network of 30 purpose-built sites, which serve more than one million customers, mostly small and medium enterprises.”

The article goes on to provide some evidence from investment analysts which addresses the potential for synergies:

Broker Panmure Gordon commented: “We like the Makro deal; we see obvious synergies, especially in catering and online and believe that it could be 20% accretive to long-term earnings”.

They clearly see a big upside for Booker shareholders. Time will tell.

Those synergies will need to be significant and achieved quickly though. Reporting on the takeover, the Independent tells us that:

“There are 30 Makro sites in the UK but the business has under-performed for several years and made losses of £63.2 million last year as it struggled amid fierce competition in the wholesale sector.”