Summary
- Booker has achieved massive success from growing its market share amongst the “Caterer” and “Retailer” customer segments. Sales and margin growth has been excellent. Growth in ROE has been largely due to these operating improvements. However, gains in market share are largely one-time and a substantial portion of the current price is growth. Customers are under pressure and the margins in the wholesale business are very thin. Nonetheless, Booker has carved out a nice niche and stayed in control of its financial position.
- The Makro deal does not build on any of these advantages. Makro does most of its business outside of Booker’s niche, operates larger stores, and offers far more products. Potential gains from a delivery and internet service seem realistic but the immutable fact is that Makro is operating in a far more competitive space with no hope of moving towards Booker’s niche.
- The company has failed to outline a clear plan of action for turning Makro around. If the company thinks it can turnaround Makro within its current niche I would say it cannot. If the company thinks it can turn Makro into Booker I would say show me how. The company’s plan offers pages and pages of legal minutiae but there is probably less than half a page of detail, if it can be called that, about how they are going to make this work. Hubris and empire-building spring to mind.
- Booker is paying a very cheap price for this deal. Looking at the property Booker is getting I would estimate they are being paid about £15m to take Makro off Metro’s hands. Unfortunately, in the long run this may not look like such a bargain.
- Considering the limited upside in this deal for current holders of the stock and the fact they are probably sitting on large paper gains, I would watch this one through the year as a potential short. Given the current valuation, any failure to recognize synergies would be a disaster.
Booker are far from the typical value stock. Equity is worth just under £1.4bn and trades at around 18.5x trailing earnings. This valuation is understandable as there has…
