A tale of two companies shows why chief execs count
IT WAS the best of times for Britain’s biggest food wholesaler Booker on 24 May. Its preliminary results showed another good year: sales of £3.9bn, pre-tax profit up 27 per cent to £90.8m and a net cash pile of £63.4m. Why then did its share price rise yesterday by almost 10 per cent after it acquired a loss-making firm experiencing the very worst of times? In the end, because the City trusts the team at the top.
Booker’s newest addition is Makro UK, a cash and carry chain. It was owned by Metro, the German retail and wholesale group, which has not had an easy year itself, with the group’s first quarter results showing a net loss of €82m (£65.4m).
Under its new chief executive Olaf Koch, Metro is divesting itself of businesses that generate insufficient revenue. Makro UK must have been high on the list: its revenues have fallen 12 per cent since 2009. In 2011, Makro UK managed to turn £800m of revenue into a £63.2m pre-tax loss.
It could, then, be tempting to see those horrible figures as the reason Metro’s shares rose yesterday by 1.28 per cent, while the rest of Germany’s Dax index fell 1.81 per cent overall.
Yet that’s not quite fair. Metro has not only divested itself of a failing business. Like those who bid up Booker’s price yesterday, Metro has taken a stake in someone else’s power to turn it around.
Despite sitting on so much cash, Booker negotiated a deal where Metro takes just £15.8m for Makro UK, along with a 9.99 per cent stake in Booker, which it has to hold for at least 12 months. There’s talk of a strategic UK partnership between the groups.
Metro and the stockpickers are ultimately betting on the vision of Charles Wilson, Booker’s chief executive. After the turnaround at Booker, they believe in his team’s ability to make a big success of Makro UK. The announcement claims that the acquisition will only eat into earnings for the first year. If Wilson’s plan works, Makro UK will enhance the group’s earnings as soon as the following year.
Looking at the details, that sounds pretty optimistic. The acquisition brings more than 1m new customers and 30 stores, but these customers spend 10 times less per head than Booker’s do. The loss-making stores also stock three times as many lines as a typical Booker branch. The increased choice looks costly.
There’s something of a customer mismatch as well. Makro UK specialises in small and medium-sized firms, purchasing items like furniture and office supplies. Booker’s focus is on the catering trade. A more obvious fit might have been an acquisition of cash and carry retail customers, to exploit the food and drink ranges Booker brings to the table.
But in the end none of that matters. Most analysts believe that Wilson has spotted potential. Pending shareholder approval, he has certainly bought himself a good relationship with a significant European player.
Chief executives aren’t getting much credit just now, so it’s refreshing to be reminded just how much difference the name at the top really does make to investors.