Tesco's third-biggest shareholder Schroders has written to the retailer's chairman urging him to withdraw from the Booker takeover.
It has encouraged other shareholders with similar views to follow suit in making them heard.
The full text of the letter is as follows:
Dear Mr Allan,
Further to our previous correspondence, we would like to reiterate our position asking you to withdraw from the proposed merger with Booker plc.
We believe that chief executive Dave Lewis and his management team have until now done an excellent job at Tesco. As a long-term shareholder with a 4.5 per cent stake, we have been supporters of the focus on improving operating margins, reducing leverage and simplifying the business. However, there is more to be done to achieve a successful turnaround of Tesco’s business.
At Schroders, we take our stewardship responsibilities seriously. Any engagement with a company in which we invest is underpinned by a desire to ensure that the company is creating long-term value for its owners, our clients.
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. From 2007 to 2016 Booker’s profits have increased from £36m to £153m and margins have risen from 1.2 per cent to 3.1 per cent; both are now at their highest ever levels. Tesco is paying over 23 times this peak operating profit, a multiple which will make the creation of shareholder value extremely challenging.
We also note that Richard Cousins resigned from the Tesco’s board as senior independent director over this proposed transaction. This demonstration of integrity delivers a powerful message about his concerns around the merits of the deal. We welcome Richard’s honest and forthright actions and would encourage other FTSE non-executive directors to follow his lead if they see fit.
We will be encouraging other shareholders who see our views to voice them. Thus we urge you to reconsider and withdraw the offer.
Nick Kirrage Fund manager, Schroders
Jessica Ground Global head of stewardship