After months of ‘highly competitive’ negotiations, Tesco has finally agreed to sell its South Korean division Homeplus for £4bn in cash. The deal, with a consortium of investors led by South Korean PE firm MBK Partners, arguably marks the most important step so far on its long road to recovery after last year’s financial train wreck.
‘This sale realises material value for shareholders and allows us to make significant progress on our strategic priority of protecting and strengthening our balance sheet,’ said chief executive Dave Lewis.
‘Drastic Dave’ was faced with a stark choice last year when he took the reins of a company battered on one side by the onslaught of Aldi and Lidl and on the other by a decline in the popularity of out-of-town supermarkets: attempt to preserve market share or retreat, cut costs and try to restore investor confidence. He chose the latter.
Selling Homeplus will reduce Tesco’s total indebtedness by £4.2bn to £17.5bn (though the sale will net £3.35bn after tax and fees, it also reduces capitalised leases and other commitments), and will go a long way to lifting its credit rating back above junk.
That’s not to be sniffed at, but it comes at a price. Although Tesco’s Korean arm has had a tough time recently due to harsh new regulations on hypermarket opening hours, the fact remains it’s a strong business.
Homeplus contributed 7.7% (£5.4bn) of Tesco’s revenue last year, but provided 21% (£292m) of its trading profit and only 4.7% of the brutal £6.7bn impairments and one-off costs that cast the group so deeply into the red. On the surface, it’s really not an obvious part of the business to ditch (from Tesco's point of view - potential purchasers of course are only interested in buying the profitable bits), unless you really had to.
Unfortunately for Lewis, of course, that’s exactly the position he is in. Net debt rose by £1.9bn last year. Lewis has already cancelled the dividend, cut planned capital expenditure by £1bn and made an asset swap with British Land to protect against painful rate rises, but it remains to be seen whether that will be enough to bring the debt down in a meaningful way.
Selling Homeplus will certainly do just that, and will also leave Lewis more time to focus on the core business, which –let’s face it – needs it. The sale is especially welcome as its data business Dunnhumby doesn't look like it'll raise what Tesco hoped it would. Investors welcomed the news with a definite ‘meh’ – shares fell 0.25% to 185.6p in mid morning trading.