Tesco's share price has jumped seven per cent at the open after announcing a £3.7bn merger with wholesaler Booker Group.
Booker Group's share price jumped 14 per cent.
Analysts are calling the merger between the two food giant a "game changer". However, the deal will be coming under intense scrutiny from the competition watchdog.
Richard Lim, chief executive of Retail Economics, said: “Tesco’s announcement to merge with Booker Group will be a game changer in the food industry.
“Its laser-like focus on the core UK food business is cutting deeper down the supply chain. The acquisition will strengthen Tesco’s wholesale and supply chain expertise while its digital capabilities will improve efficiency and provide significant cost saving synergies."
Retail analyst Nick Bubb said that the Competition and Markets Authority (CMA) will have a "field day" with the deal, because Tesco owns the One Stop chain of convenience stores, which compete with stores such as Londis and Premier, owned by Booker.
"It is by no means clear that the CMA will allow things to proceed very far without having a good look at the overlap," Bubb said.
The deal values Booker at 205.3p per share, a 12 per cent premium on its closing price yesterday. Booker shareholders will own 16 per cent of the new company.
Neil Wilson, senior market analyst at ETX Capital, said:
At first glance Tesco’s merger with Booker makes perfect sense. Tie up the end-to-end wholesale/retail business and make savings in the process. Cost synergies of around £200m a year, mainly from buying and distribution, look like the main selling point for Tesco shareholders, who are going for this deal hook line and sinker.
Tesco says the merger (or is it an acquisition?) will generate a return greater than the cost of capital within two years of completion.