By Simon Jessop and Ben Martin
LONDON (Reuters) - Investors in retailer Booker (L:BOK) should reject a "less than compelling" 3.7 billion pounds ($5.2 billion) takeover bid by British market leader Tesco (L:TSCO), a top advisory firm said.
Institutional Shareholder Services (ISS), which advises pension schemes and others on how to vote on corporate issues, said in a note dated Feb. 14 the planned cash-and-shares deal was skewed towards Tesco shareholders at its current level.
The view of ISS mirrors that of activist hedge fund Sandell Asset Management, which owns 1.75 percent of Booker and has said it wants the deal scrapped unless the target can secure better terms.
Calling the premium Tesco offered compared with Booker's pre-approach valuation "appropriate", ISS said the latter's wholesale sector peers had since seen their share prices rise strongly, partially eroding the premium.
Also, estimated synergies of 200 million pounds from the deal were close to matching Booker's full-year 2019 earnings before interest and tax estimate of 218.2 million, which made the deal "extremely compelling for the acquirer".
"In essence, the merger presents attractive growth opportunities and strong rationale for Tesco underpinned by significant expected synergies, while the rationale for Booker shareholders to give up control appears less than compelling at the relatively low premium offered," it said.
If the deal were to fall apart, ISS said there was "seemingly limited downside risk" of around 5 percent for Booker's share price, given strong share price gains since the deal was announced.