For Tesco, a £235m bill to settle investigations by the Serious Fraud Office and Financial Conduct Authority counts as a tidy piece of business. The sum will wipe out almost 20% of operating profits last year, but the company’s negotiating power was approximately zero after it had confessed to a £326m overstatement of profits in 2014. Assuming the deferred prosecution agreement between the SFO and Tesco Stores Ltd is approved by a judge next month, an ugly chapter for the company will close.
Tesco may even be delighted that the FCA has designed a redress scheme for disgruntled investors who bought Tesco shares and bonds in the few weeks before the overstatement was corrected. An orderly process to award compensation, even one that could cost Tesco £85m, sounds less messy than several rounds of legal argy-bargy.
But, as one headache clears for chief executive Dave Lewis, another arrives. Two of Tesco biggest shareholders – Schroders and Artisan Partners – think the proposed £3.7bn takeover of food wholesaler Booker is a stinker. They own 9% of shares between them and have called for others to join the rebellion.
A public display of dissatisfaction at a large FTSE 100 company is unusual but welcome. Fund managers who do their own homework, challenge management and shout if they are unhappy should be applauded. A robust debate is much better than a quiet sale of the shares. Richard Cousins, the Tesco non-executive who resigned in protest at the Booker proposal, also deserves another honourable mention: he was paid to be independent in his views and he was.
At the moment, Lewis and Tesco may feel the Competition & Markets Authority, and not a pair of revolting shareholders, is the bigger obstacle to getting the Booker deal done. Let’s see if life works that way in practice.
One of the complaints from Schroders and Artisan is that Booker would be a big distraction from the day job of improving returns from the core UK supermarkets. For Tesco to defeat that argument, its trading will have to be near-perfect during the CMA investigation, which could take six months. Anything less than perfection will invite the charge that minds are already drifting.
Booker, too, will have to sail on merrily because the takeover price isn’t obviously cheap, as Schroders and Artisan point out. Tesco would be paying 23 times earnings for a company that has been radically improved over the past half-decade but may have reached top speed. Yes, £200m of annual savings are up for grabs, the companies estimate, but 23 times earnings is still an almighty rating for a food distribution business.
Lewis’ pitch, in essence, is “trust me, I know what I’m doing”. Few would doubt his regime has restored Tesco’s competitiveness, but it hasn’t yet delivered for shareholders. The share price is still below 200p, as it was in 2014, and the restoration of a dividend – due this year – is merely happening on time, rather than ahead of schedule. It wouldn’t take much for the Schroders/Artisan arguments to gain ground.
If only 9% of the troops are restless, the board can probably afford to ignore them. Yet colossal majorities are the norm in agreed takeover deals: at 20% resistance, Tesco and Lewis would be in trouble. This scrap has a long way to run.
Weighing up the odds for Ladbrokes Coral
“The year ended with a sharp reminder that nervous times are never far away,” said Jim Mullen, chief executive of newly merged Ladbrokes Coral. Apparently, it was only a home defeat for Newcastle United to Sheffield Wednesday on Boxing Day that saved the bookies from a “black swan” event on accumulators and multiple bets.
But Mullen could equally have been referring to the government’s review of fixed odds betting terminals (FOBTs), announced at the end of October. Quite how much is at stake for Lad Coral was underlined in the maiden set of combined figures: net revenue from machines was £802m in 2016, or 56% of the total from 3,500 shops.
Not all that revenue would disappear if the government reduced maximum stakes from £100 to £2, but City estimates of the financial damage (for the bookies, not the mugs playing electronic roulette, obviously) range from bad to calamitous. Lad Coral could be looking at a £100m hit to top-line profits.
If one can ignore that risk, the company’s early form is promising. Mullen reckons he can find another £35m of merger savings, on top of the original £65m. Operating profits rose 22% to £264m last year, even if the bottom-line figure was a huge loss after one-offs and impairment charges.
Take your pick: for ex-Ladbrokes investors, prospects look brighter than they have for years. Alternatively, the government could crush the optimism at a stroke. Still, those odds beat roulette.
