Credit: C41n/Wikipedia

Tesco 'to retreat' from South Korea

The supermarket could be about to offload its largest international subsidiary in a bid to save its core business.

by Adam Gale
Last Updated: 15 Jun 2015

As a military manoeuvre, retreating isn’t always a sign of defeat. A smart commander fights battles on his or her own terms, after all, not those imposed by an opponent. Besides, sometimes discretion is the better part of valour.  

Tesco boss Dave Lewis is understood by mysterious Reuters sources to have hired HSBC to look into selling its Korean business, Homeplus. With 400 directly-owned stores and several hundred franchises, the sale would be likely to fetch something in the region of £4bn.  

Tesco expanded into the peninsular seven years ago, in the height of its hubris, but the business currently isn’t faring well. Indeed, last year, revenues fell more steeply in Asia than in the UK (4.1% vs 1.8%). The Korean segment amounted to £5.4bn of sales, down 4% from last year.

Given that a focus on international expansion at the expense of its domestic business arguably left Tesco particularly unable among big supermarkets to handle the change in British shopping habits and the onslaught of discounters Aldi and Lidl, a retreat seems to make sense.

Tesco’s net debt increased by nearly 30% last year to a staggering £8.5bn and its credit rating has been junk since January. This leaves the business highly vulnerable to interest rate hikes, and it scares investors.

Lewis has already attempted to reverse Tesco’s overstretch and reduce the debt, putting its data arm Dunhumby up for sale earlier this year. According to the Sunday Times, he rebuffed offers for Homeplus from US private equity firm Carlyle a month ago, though, implying his position on the matter is still ‘evolving’.

Getting a few billion in the bank surely wouldn’t hurt Tesco’s finances and a smaller, more compact firm focusing on what it does best is more likely to weather the ongoing retail storm. Tesco would do well to figure out what it actually is that it does best, of course, but that’s by the by.

Investors perhaps want more concrete confirmation that this is actually happening, or else they’re just unimpressed at having to sell what had been a reliably good business. Shares fell a measly 0.2% to 208.3p this morning, outperforming the FTSE 100.

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