Tesco has reached an agreement to buy food wholesale business Booker in a deal valued at £3.7bn, announced on 27 January.

The companies said the surprise move would provide "greater choice, quality, price and service" in the UK food market.

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."

Booker owns grocery chains Budgens and Londis and has over 170 cash and carry locations in the UK.

It is also the UK's largest cash and carry operator, selling everything from baked beans to PG Tips to 700,000 small businesses, including convenience stores, grocers, pubs and restaurants.

The deal values Booker at 205.3p a share, a premium of 12% per cent over its closing price of 183.1p a share on 26 January, the day before the deal was announced.

Tesco said Booker shareholders will receive 42.6p in cash and 0.86 in new Tesco shares. The merger will result in Booker shareholders owning 16% of the combined company.

Improving choice

Booker chief executive Charles Wilson said: "Booker is committed to improving choice, prices and service for the independent retailers, caterers and small businesses that we are proud to serve.

"We believe that joining forces with Tesco offers the potential to bring major benefits to end consumers, our customers, suppliers, colleagues and shareholders."

Tesco, Britain's biggest grocer, said the new deal will allow the bigger group to serve customers with better quality food at "attractive prices".

It added the move would mean it would be able to "help independent retailers, caterers and small businesses by further improving choice, price and service."

The companies said on completion of the deal Booker chief Wilson and chairman Stewart Gilliland will join the enlarged group's board, although their new roles have not been disclosed.

Price war

The deal comes as the supermarket industry endures its third year of falling prices, as major players, such as Tesco and Sainsbury's, have been dragged into a price war by discounters Aldi and Lidl.

However, prices across the high street are expected to rise this year due to the weaker pound and rising inflation.

Last year Sainsbury's bought general retailer Argos for £1.4bn , lessening its reliance on its low-margin grocery business.

Tesco said group like-for-like sales lifted 1.5% in the 13 weeks to 26 November year-on-year, buoyed by a strong performance among its fresh food ranges and party food at Christmas.

This recovery in trading at Tesco marks a turnaround after a torrid couple of years at the business, when it posted the biggest loss in its history and was hit by a £326m accounting scandal.

Lewis, who has been leading an overhaul since he took over from Philip Clarke in 2014, aims to slash costs by £1.5bn over the next three years to help boost margins and return the group to bottom-line profit growth.