Tesco has reached an agreement to merge with food wholesaler Booker in a £3.7 billion deal.
The supermarket giant said the agreement will create “the UK’s leading food business” and deliver significant efficiency savings for the combined group.
Booker is the country’s largest wholesaler and owns Londis and Budgens as franchised outlets.
Tesco chief executive Dave Lewis said: “Tesco has made significant progress in turning around our UK retail business.
“This merger with Booker will further enhance Tesco’s growth prospects by creating the UK’s leading food business with combined expertise in retail, wholesale, supply chain and digital.
“Wherever food is prepared and eaten - ‘in home’ or ‘out of home’ - we will meet this opportunity with the widest choice and best service available.”
The deal values Booker at £3.7 billion, or 205.3p per share.
It represents a 12% premium on Booker’s closing price of 183.1p on January 26.
Booker shareholders will hold 16% of the combined entity and will receive 42.6p in cash, Tesco said.
Booker’s chief executive, Charlie Wilson, will join the combined group’s board and executive committee.
Outlining the benefits of the merger, the companies said it would “delight consumers with better availability of quality food at attractive prices”, help independent retailers and cut food waste.
Shareholders have been asked to approve the deal in a vote.
Mr Wilson said: “Booker is committed to improving choice, prices and service for the independent retailers, caterers and small businesses that we are proud to serve. We believe that joining forces with Tesco offers the potential to bring major benefits to end-consumers, our customers, suppliers, colleagues and shareholders.”
Mr Lewis said the combination would result in cost savings of £175 million but stressed that it will not be “driven by a reduction in roles”.
Mr Wilson added that there is no intention for large-scale job cuts.
Mr Lewis and Mr Wilson brushed aside any potential competition concerns, with the Competition and Markets Authority (CMA) poised to review the deal.
The Booker boss said: “We think it is pro competition; the CMA will go through what it does, but we’ve had good advice on this.”
Mr Lewis has been hailed for beginning to turn Tesco around after the disastrous reign of his predecessor, Philip Clarke, which saw profits slide, market share eroded and an accounting scandal dog the supermarket giant.
The chief executive said the Booker merger is “another step on that same strategy”.
He said: “We are following the customer, the market is evolving and we believe we are better able to serve the customer.”
Richard Lim, of Retail Economics, called the deal a “game-changer”.
He said: “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.
“As shopper behaviour continues to evolve rapidly, the new group will be well placed to capitalise on home shopping and the increasingly important area of eating out which has been the growth driver of the experience economy.”