Forget Brexit, when it comes to Tesco Plc, it's all about Booxit: Will the U.K. supermarket chain be able to convince investors to back its almost 4 billion pound ($5 billion) purchase of Booker Group Plc or see the food wholesaler slip away?
Full-year results out Wednesday reassured to some extent. But a slight beating of expectations was probably the least Chief Executive Dave Lewis could have fished out of his carrier bag.
Tesco is facing pressure from two of its biggest shareholders to drop the deal. They want the retailer to focus on turning round its own business, instead.
Lewis needed to show that Tesco's recovery was on track, so that integrating Booker wouldn't be a distraction. He also needed to demonstrate that Tesco has a viable strategy without Booker's entrée into the fast-growing catering market.
Bettering expectations on the financials was helpful: Group operating profit excluding exceptional items came in at 1.28 billion pounds for the 12 months ended Feb. 25, higher than the Bloomberg consensus of 1.26 billion pounds and up 30 percent from last year. But the improvement wasn't as big as the most optimistic analysts had forecast: HSBC Holdings Plc had been looking for 1.3 billion pounds. Tesco's shares fell as much as 5.1 percent in early trade.
Operating margin was more positive, at 2.3 percent compared with 1.8 percent last year, on the way to Lewis's goal of reaching between 3.5 percent and 4 percent by February 2020.
There was also some comfort on net debt, which fell to 3.7 billion pounds from 5.1 billion pounds, although the pension deficit was stubbornly high at 5.5 billion pounds against 5.9 billion pounds at the end of August.
Tesco's stock has drifted recently, not only on worries about Booker, but also on concern Tesco's own recovery is stalling.
Recent data from Kantar Worldpanel indicates that Tesco's outperformance versus its big three British rivals -- Wm Morrison Supermarkets Plc, Wal-Mart Stores Inc.'s Asda Group Ltd. and J Sainsbury Plc -- is fading.
And life is about to get tougher: Tesco confirmed that food price inflation is beginning to come through.
Although Lewis said Tesco is passing on fewer price rises than other players, in the fiercely competitive U.K. grocery market, that situation is unlikely to last. Aldi Stores Ltd. and Lidl Ltd. will be acutely aware of the opportunity to win customers if mainstream supermarkets start ratcheting up prices.
Tesco still trades on a forward price earnings ratio of 18.7 times, on a par with Morrison and at a premium to Sainsbury. That implies Tesco's recovery will continue, something that's not guaranteed, particularly if it's forced to drop the Booker bid.
Lewis needs to convince investors suffering a crisis of confidence that integrating Booker won't derail what progress he has made. And, earnings aside, he can't afford any loss of form before Tesco and Booker shareholders vote on the merger in late 2017 or early 2018.
This Booxit campaign has a lot longer to run.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.