Tesco sells South Korean units for $6.1bn

November 2015 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

Struggling British supermarket chain Tesco announced in September that it had agreed to sell its South Korean unit to a group led by private equity firm MBK Partners in a deal worth $6.1bn.

Under the terms of the deal, Tesco will sell its biggest overseas unit – Homeplus – to a group of investors led by MBK, which also includes the Canada Pension Plan Investment Board, the Public Sector Pension Investment Board and Temasek Holdings.

By completing a deal for the divestiture of the Homeplus brand, Tesco has continued the process of retreating from overseas markets. It is the first divestiture under the stewardship of the company’s new chief executive, Dave Lewis.

Tesco has come under increasing domestic pressure in recent years from discount supermarket chains including Aldi and Lidl, which have eaten into the firm’s considerable market share. Tesco was also rocked earlier this year by an accounting scandal which has shaken confidence in the brand. In light of the company’s recent struggles, Tesco reported the largest pre-tax losses in British history last year, at £6.4bn.

As a result of these internal pressures, rising indebtedness and increasing regulatory scrutiny, the company has embarked on a restructuring process at home and abroad. Since Mr Lewis joined the firm, Tesco has closed down 43 stores in the UK and cancelled proposals to open an additional 49 locations.

Tesco will utilise the cash generated by the sale of Homeplus to help reduce its overall debt burden, in excess of £21bn, including pension obligations. In a statement announcing the deal, Mr Lewis said, “After a highly competitive process, we are announcing today the proposed sale of Homeplus, our business in the Republic of Korea. 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. I would like to thank all of our Homeplus colleagues for their dedication, professionalism and service to our customers, which has resulted in the creation of a great business. I am confident that the agreement we have reached with MBK Partners presents an exciting opportunity for their continued success.”

In order to finance the transaction, the MBK group has secured at least $3.4bn of financing from a group of South Korean financial institutions including Hana Daetoo Securities Co, NH Investment & Securities Co, Shinhan Bank and Woori Bank. The sale of the unit is expected to be completed in the fourth quarter of 2015 pending the approval of both Tesco’s shareholders and the Korean government.

It is certainly a landmark deal. Not only does it represent the first sell-off of a unit by Tesco since it encountered financial difficulty, it is also the largest ever private equity deal in Asia.

MBK and its partners are believed to have beaten competition from rival PE firm KKR & Co. The private equity firm announced that the consortium will invest around $831m in the business over the next two years to boost the company’s competitiveness.

Homeplus is a major force in South Korean retail. The unit boasts 140 hypermarkets, 375 supermarkets and 327 convenience stores across the country. However, of late the brand’s standing has slipped somewhat. Recently, Homeplus’s earnings have fallen and its profit margins halved as harsh new regulations targeting larger store brands have come into effect. Under the new regulations, larger stores are required to close every other Sunday in order to protect local businesses. Sunday is South Korea’s biggest trading day of the week.

Although the Homeplus brand provided Tesco with annual earnings of around £150m, the time appeared right to exit a business that it had contemplated divesting for some time.

Richard Summerfield