It wouldn’t surprise me if Dave Lewis felt he needed to strap on a flack jacket every day before heading into Tesco’s HQ, writes Deirdre Hipwell, retail and M&A editor at The Times.
The chief executive parachuted into restore Tesco’s fortunes in September 2014 has had what can only be described as a two-and-half-year tour of duty so far.
Since he has been in charge Tesco has had to admit to a £326m accounting black hole, which led to it reporting one of the biggest corporate losses – £6.3bn – in British history in 2015. The retailer has been subject to four regulatory investigations, found guilty of mistreating its suppliers, and hit with four civil litigation claims.
It has been tough going even for a chief executive dubbed “Drastic Dave”.
However, it is fair to say that Lewis is winning the battle to turnaround Tesco.
This week Tesco made headway in drawing a line under its “black hole” scandal after its Tesco Stores subsidiary agreed to pay a fine of £129m for false accounting in a deferred prosecution agreement with the Serious Fraud Office. The agreement, which still has to be approved by a court next month, applies to Tesco Stores and not its parent company, Tesco plc. In addition, the agreement does not address whether any liability attaches to Tesco plc or any of its employees or those of Tesco Stores. The US-style DPA means Tesco escapes a costly prosecution.
Separately, the retailer has also agreed to a finding of “market abuse” and set up a compensation scheme with the Financial Conduct Authority to reimburse about 10,000 institutional and retail investors who may be out of pocket as a result of the false accounting.
There is nothing to be proud of in paying out £235m in fines and compensation, as Lewis himself acknowledged this week, but it does mean that Tesco’s accounting saga is coming to an end.
And fewer problems relating to historic accounting practices should free up Lewis to pursue his potentially career-defining move to takeover Booker Group, the nation’s largest wholesaler, in a £3.7bn transaction.
The ambitious chief executive believes that joining forces to serve the “in home” and “out of home” markets will give Tesco the edge in one of the world’s most competitive food sectors.
However, it is starting to appear as if pulling off the deal may not be as easy as Lewis hoped. The proposed transaction has already led to the protest resignation of Richard Cousins, the former senior independent director, and earlier this week Schroders and Artisan Partners said Tesco should withdraw from the deal. The duo – both top-five investors in Tesco – said the retailer was paying too much for Booker and could end up wrecking its own nascent recovery and destroying value for shareholders.
Some of the shareholder unrest is in part because no one saw the deal coming. Tesco and Booker caught the market by surprise. Investors are having to take a view on whether the purchase price is right and whether the expected synergies and enhanced profits from the combination can be retained in the years to come.
There is also a legitimate question as to whether Tesco should be doing this deal at all. Tesco is a complex business, with a large international arm, a bank, a mobile phone business and a sizeable debt pile. Will this deal help successfully diversify the business or distract it at a time when an already stretched grocery sector is in for another challenging year beset with rising costs and inflation?
Charles Wilson, the boss of Booker, has certainly put his money where his mouth is. He has elected to exchange all his shares in Booker for Tesco shares – worth more than £200m – and lock them up for five years. That seems a compelling indication that he at least is confident that this is a good deal.
However, Schroders and Artisan are heavyweights and investor sentiment seems to be cooling a tad. Shares in Tesco hit 206.5p a share when the deal was announced but have since fallen to 191.2p at the market close on Tuesday. Booker’s shares are down too.
There may be many a sceptic quite rightly asking is this the right deal at the wrong time? Or even worse, is this the wrong deal at the wrong time?
