Tesco is to take over food wholesaler Booker in a £3.7bn deal which it says will “delight consumers” – but may attract competition concerns.
Britain’s biggest supermarket said it would mean “better availability of quality food at attractive prices”.
Booker operates the UK’s biggest cash and carry network with 200 branches, serving independent retailers, catering and small business customers, as well as national retail chains plus cinemas.
It also owns convenience store chain brands Premier, Londis and Budgens, which together cover nearly 5,000 sites.
On one view the deal could help Tesco push suppliers to keep their prices down – after last year’s “Marmitegate” row showed the pressure to lift prices after the slump in the pound.
But the combination between the two market leaders also looks likely to result in competition concerns.
However chief executive Dave Lewis told Sky News the deal would not mean it had more stores – since the convenience brands operated by Booker operate through franchises to independent retailers.
He expressed confidence that takeover would not be held up by a competition probe.
Mr Lewis also said the deal would not see the businesses operated by Booker rebranded as Tesco – and denied that it was about gaining more “muscle” in its dealings with suppliers.
Tesco shares closed 9% higher. Booker shares were up 16% reflecting the premium Tesco is paying on the valuation of the business.
The deal is subject to approval by shareholders and the Competition and Markets Authority.
It is expected to complete later this year or early in 2018.
Tesco chief executive Dave Lewis said: “Tesco has made significant progress in turning around our retail business.
“This merger with Booker will further enhance Tesco’s growth prospects by creating the UK’s leading food business with combined expertise in retail, wholesale, supply chain and digital.”
Booker chief executive Charles Wilson said: “Joining forces with Tesco offers the potential to bring major benefits to end consumers, our customers, suppliers, colleagues and shareholders.”
The companies expect to make cost savings of £175m a year following the merger.
Laith Khalaf, senior analyst at Hargreaves Lansdown stockbrokers, said the deal would inevitably lead to questions over Tesco’s retail hegemony, since it involves the Londis, Budgens and Premier brands.
But since these were badges franchised to independent retailers “the competition authority may not raise an eyebrow”.
Mr Khalaf added: “The widening of Tesco’s distribution should also give it even greater bargaining power with its suppliers, who may be thinking about raising prices because of the weaker pound.
“In theory this should mean keener prices for customers, though the fall in sterling has been so dramatic that supermarket prices may yet rise, despite the competitive environment.”
Tesco recently posted a 0.7% rise in like-for-like sales over Christmas, but warned it faced pressure from the slump in the pound.
Last year it was involved in a stand-off with consumer goods giant Unilever, maker of a range of products including Marmite, Ben & Jerry’s and Domestos, after it tried to raise its wholesale prices.
Unilever said the hike was the result of the sharp fall in the pound since the Brexit vote and this week defended its stance, saying Britain should “get used to” higher prices.