Coverage: Tesco sells off South Korean unit

Tesco, one of Britain’s largest grocery store chains, announced a deal to sells it South Korean operations for more than $6 billion. The deal comes at just the right time for the company, which posted its worst ever loss of $9.5 billion last year.

Saabria Chaudhuri and Rick Carew of The Wall Street Journal had the story:

Tesco PLC on Monday said it has agreed to sell its South Korea business for $6.1 billion in cash, the latest in a series of pullbacks by the supermarket chain, which is increasingly focused on turning around its struggling operations in Britain.

Tesco will get £3.35 billion ($5.1 billion) after adjusting for tax and other costs from the sale of its Homeplus chain to a consortium led by Asian private-equity firm MBK Partners LP. The transaction marks South Korea’s largest private-equity deal ever.

The sale of the South Korea arm, which is Tesco’s largest international business by revenue, comes as the retailer has embarked on an about-face from its strategy under former chief executive Terry Leahy who pushed Tesco into major markets like China and the U.S. with ambitions of building a company with the heft of Wal-Mart Stores Inc.

Chad Bray of The New York Times breaks down company CEO Dave Lewis’ motivation to sell its South Korean operations:

The deal is expected to help Tesco reduce its debt as Mr. Lewis seeks to reverse the retailer’s losses.

Mr. Lewis, a former Unilever executive who joined Tesco in September, has made broad changes, closing more than 40 stores, cutting thousands of jobs and selling noncore assets. He has also put his top executives on the floor at certain stores to help understand and improve the customer experience.

Tesco has steadily lost market share in recent years to discount retailers like the German grocers Aldi and Lidl, and it has faced pricing wars with its British rivals. It has also been mired in investigations concerning a £263 million overstatement of profit.

The retailer recorded a loss of £6.4 billion last year, its worst ever.

The Homeplus deal would reduce Tesco’s debt by £4.2 billion, but still leave it with about £17.5 billion in debt.

The transaction also represents the latest global retrenchment by Tesco in recent years.

The company divested its Japanese operations in 2011 and sold most of its United States business in 2013 to an affiliate of Yucaipa, the private equity firm owned by the billionaire Ronald W. Burkle.

Tesco said it would continue to have “strong businesses” in Southeast Asia, along with its operations in Britain, Ireland and other parts of Europe.

HSBC and Barclays are advising Tesco on the transaction.

Reuters’ James Davey and Joyce Lee looked at the deal from an investment standpoint:

Shares in Tesco, down 19 percent over the last year, slipped 0.3 percent by 0951 GMT after an initial rise of up to 2 percent.

Tesco will use the proceeds to redeem upcoming bond and commercial paper maturities over the next 18 months. It will also consider the purchase of some UK leasehold stores.

The sale comes after the 96-year-old group announced in April one of the biggest losses in British corporate history, hit by a 7 billion pounds write-down.

Bernstein analyst Bruno Monteyne, a former senior Tesco supply chain executive, said the deal should allay fears the firm will need to ask shareholders for cash to secure its balance sheet.

He said it would only have a small impact on the net debt to core earnings ratio, moving it from 6.2 times to 6.0 times for the 2015-16 financial year.

But he said it would enable Tesco to get below the 4.5 times ratio needed by ratings agency Moody’s for an investment grade credit rating in 2017-18.

Completion of the disposal, which requires the approval of Tesco shareholders and regulators, is expected during the fourth quarter of 2015.

Lewis will now turn his attention to the sale of Tesco’s customer data business Dunnhumby, which he put on the block in January.

Reuters had previously reported that MBK was the preferred bidder for Homeplus, which has 140 hypermarkets, 375 supermarkets and 327 convenience stores.

The MBK consortium said it planned to invest 1 trillion Korean won ($831 million) in Homeplus over the next two years to boost its competitiveness.

HSBC Bank acted as Tesco’s lead financial adviser and Barclays Bank as financial adviser and sponsor. Deutsche and CitiGroup advised MBK.

Bloomberg’s Sam Chambers and Ruth David laid out how this is just the first in a potentially long line of sell offs for the company:

Tesco Plc, which announced the sale of its South Korean business Monday, is also considering divesting its central and eastern European operations to further reduce debt, according to three people familiar with the matter.

While the company is discussing options with advisers, no final decision has been made, said the people, who asked not to be identified as the discussions are private. The business, valued by Sanford C. Bernstein at 1.9 billion pounds ($2.9 billion), includes over 1,110 stores that generate 6.45 billion pounds of revenue. Shares of Tesco’s Turkish unit rose as much as 9.3 percent.

Tesco Chief Executive Officer Dave Lewis has pledged to shore up the company’s finances and regain an investment-grade credit rating. The agreement to offload its South Korean business knocks 4.23 billion pounds off total borrowings. Yet the figure represents just under one-fifth of the retailer’s indebtedness. A Tesco spokesman declined to comment.

Alongside the Korea sale, Tesco is exploring options for its Dunnhumby data-analytics unit. A sale of its Thai business, which includes more than 1,700 stores, could fetch in excess of 4 billion pounds, estimates John Kershaw, an analyst at Exane BNP Paribas.

Compared with its operations in Asia, Tesco’s stores in central and eastern Europe — spanning Hungary, Poland, the Czech Republic, Slovakia and Turkey — have less to offer potential acquirers, according to analysts. Sales have fallen for three straight years amid intense competition from low-cost retailers like Germany’s Aldi.

“In its central and eastern European markets, economic conditions have been tough,” Bryan Roberts, an analyst with Kantar Retail, said by phone. “Tesco has been getting an absolute kicking from the discounters.”