Tesco has reached an agreement to buy Wellingborough food wholesaler Booker in a £3.7bn deal.
The grocery giant said the tie-up will create “the UK’s leading food business” and deliver significant cost savings for the combined group.
Booker is the country’s largest wholesaler and owns the Londis and Budgens convenience store brands.
The companies said the deal would bring “benefits for consumers, independent retailers, caterers, small businesses, suppliers and colleagues, as well as delivering significant value to shareholders”.
Tesco shares jumped more than 10 per cent in morning trading as investors welcomed the news.
Tesco chief executive Dave Lewis said: “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.”
However, experts believe the deal, which the pair are describing as a merger, will face regulatory scrutiny from the Competition and Markets Authority (CMA).
Independent retail analyst Nick Bubb said: “The CMA will have a field day with this, as although Tesco is mainly a retailer in the UK and Booker a wholesaler, Tesco does own the One Stop convenience store chain that competes with Booker’s interest in symbol groups and convenience store retailing.
“So it is by no means clear that the CMA will allow things to proceed very far without having a good look at the overlap.”
But Mr Lewis and Booker chief executive Charlie Wilson batted away suggestions of potential competition concerns.
Mr Wilson said: “We think it is pro-competition; the CMA will go through what it does, but we’ve had good advice on this.”
The deal values Booker at £3.7bn, or 205.3p per share, a 12 per cent premium on Booker’s closing price of 183.1p on January 26.
Booker shareholders will hold 16 per cent of the combined entity and will receive 42.6p in cash.
Shareholders have been asked to approve the deal in a vote.
Mr Lewis said the combination would result in total savings of £200m, but stressed that it will “not be driven by a reduction in roles”.
Mr Wilson - who will join the combined group’s board and executive committee as part of the deal - added that there is no intention for large-scale job cuts.
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”.
Neil Shah, director of research at Edison Group, said the deal could help in the fight against Amazon and budget operators Aldi and Lidl.
He said: “With Booker onside, Tesco will have smart first mover advantage in tying up the food supply chain in the brave new world of online shopping, with Amazon the main disrupter and a pricing race to the bottom within the core grocery stores market catalysed by Lidl and Aldi, all of which makes shopper loyalty increasingly fickle.”
Alongside the deal, Tesco also announced plans to resume its dividend next year.