Green grows the Tesco-o
The BBC is probably a bit too obsessed with Tesco, so I feel sheepish in drawing to your attention that the great supermarket whale has this morning announced a takeover offer for a Scottish garden centre company (of all things) called Dobbies.
By its standards, Dobbies is just a light snack, a bit of plankton. It is paying £156m for a chain of 21 stores across Scotland and Northern England, which is the equivalent of less than three weeks of its own cash flow.
But it obviously wants this business pretty badly, because it is paying a fairly steep price in relative terms. The offer is the equivalent of more than twice Dobbies’ annual turnover and 17.5 times Dobbies’ earnings before interest, tax, depreciation and amortisation or EBITDA, which – for those not steeped in EBITDA lore – means it is paying 17.5 times this crude measure of operating cash flow.
The point of the deal, according to Sir Terry Leahy, Tesco’s chief executive, is to further reinforce Tesco’s green credentials – not in the sense of “green fingers” but the other more modish “green”.
This is how Leahy puts it: “The increasing popularity of gardening, and in particular the trend towards environmentally friendly products, makes this an attractive sector for Tesco to invest in. The deal is an important part of our strategy to provide customers with greater access to affordable energy saving and environmental products. Garden centres are ideally placed to support this because for many people gardening is the way they express their desire to be green.”
I’ll be honest, but that’s not how I’ve ever thought of garden centres – but I can see what he means. So to be clear, this is NOT Tesco acquiring a load of freehold sites that might one day be convertible into supermarkets, should the tyrants of British planning allow such a conversion. Nothing could be further from Tesco’s mind: this is diversification.
But I nonetheless think the competition authorities should spend more than a few minutes considering the implications and whether the deal should be allowed. Right now, Tesco is deemed to be far too big to be allowed to buy another supermarket company. It circumvented that restriction a few years ago by buying a big chunk of the convenience store market, running rings around competition watchdogs.
Tesco is now so big in so many different product lines, there is a proper question to be asked about whether it should be allowed to expand at all through takeovers of any kind of retailer in the UK – as opposed to outside Britain, where the same concerns don’t apply.
Dobbies is a fairly small business in an apparently discrete sector. But as part of Tesco, it would be converted into a wholly different kind of economic force, a kind of fertiliser for a whole new form of the Tesco-isation of Britain. Green grows the Tesco-o.