Comparative Analysis: Metro AG and Booker Group

Introduction

The present management report compares businesses of Metro AG (“Metro” or the “Group”) and Booker Group plc (“Booker”), discusses effects of the recent economic situation on these companies, assesses their recent financial performance and risk exposures, recommends the optimal acquisition strategy in respect of these two targets and critically assesses the financial analysis techniques employed to determine the relative attractiveness of the two targets.

1. Internal Management Memo

1.1. Metro

Metro is a leading diversified retail group with headquarters in Düsseldorf, Germany holding a portfolio of brands with about 250,000 employees and over 2,000 stores in 31 countries in Europe and Asia. The Group’s subsidiaries sell goods

Metro

The principal locations of operations of Metro are Germany and Western Europe where 71% of sales were made. The best economic aggregation of the geographical area there is the Euro area. The economic conditions in the Euro area in 2013 and 2014 were as follows.

Euro area was in recession until the beginning of 2014 (Fig. 1, Appendix 1). The European Central Bank (ECB) had been cutting the basic rate until it almost reached zero in 2014 (Fig. 2, Appendix 1). Inflation was relatively low and a short period of deflation was observed in the beginning of 2015 (Fig. 3, Appendix 1). Although the unemployment rate was decreasing, it remained high in 2013 and 2014 (Fig. 4, Appendix 1).

In 2014, the consolidated revenues of Metro decreased by €2.6 billion or 4% and EBIT fell by €0.4 billion to €1.3 billion or by 25% compared with 2013. The major parts of the decrease in sales of €1.9 billion and €2.4 billion respectively were attributable to Real hypermarkets and Eastern Europe respectively. This change was due to disposal of Turkish operations by Real. It seems that no other factors had any material effect on Metro’s performance (Metro Group,

5, Appendix 1). The benchmark interest rate did not fluctuate and remained at the level of 0.5% per annum (Fig. 6, Appendix 1). Inflation in the UK was not high during the period and turned to zero by the beginning of 2015 (Fig. 7, Appendix 1). The unemployment rate was not high during 2012-2015 and was steadily decreasing (Fig. 8, Appendix 1). Thus, the recent economic conditions in the UK were more favourable than in the Euro area. In 2014, Booker’s revenue increased by 17% to £4.7 billion and operating profit was higher by 23% to £0.12 billion. It is seen that more favourable economic conditions in the UK compared to the Euro zone explain higher growth of sales of Booker compared to Meetro. Favourable results were also achieved despite the process of internal aligning of operations with the new acquiree