Tesco face the power of Shareholders over Booker deal

Tesco's are facing a shareholders' revolt. Schroders, their third biggest shareholder, have written to the Chairman and urged other shareholders to join them in opposing the deal to buy food wholesaler Booker. They cite the huge risks of failing to gain synergies faced by most takeovers: “The high price being paid for Booker makes the destruction of value even more likely [than in an average deal].”Tesco face a reminder that the power of shareholders may be overpowering if the divorce of ownership (the shareholders) and control (the managers and board) rears its head.

Schroders and Artisan Partners are the third and fourth biggest shareholders in Tesco, owning roughly 4.5% of the company's shares each - so they have real power in the decisions made by the company's managers whom they employ. Both have worries about Tesco's plans to buy Booker, which were announced in January this year. Both of them start with a tribute to the turn-around being put into effect by CEO Dave Lewis, following the devastating £6.4bn loss two years ago.

Artisan Partners have praised Lewis's retrenchment away from overseas business in South Korea and the Turkey, and from diversification into Giraffe restaurant group and the Euphorium bakery chain. Lewis has faced an accounting scandal, the growth of Aldi and Lidl and the supermarket price wars of the last few years, and turned the business around into profit. Artisan have described Tesco, pre-Dave Lewis, as a train wreck, and said that: "We just don’t understand, in a business as fragile as retail, why on earth would we risk distracting ourselves from that huge goal”

Like Schroders, Artisan are worried that the huge advances made in simplifying the business will be wiped out by the attempt to integrate with a business specialising in another part of the food market. Booker's customers range from corner stores to Michelin-starred chefs, and are different from the market that Tesco knows and excels in. Schroder's letter to the Tesco Chairman is very clear in its view: it says “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.

“We believe the high price being paid for Booker makes the destruction of value even more likely. We will be encouraging other shareholders who share our views to voice them. Thus we urge you to reconsider and withdraw your offer.”

Can this takeover buck the trend, and achieve what it is supposed to do?