Tesco eyes property potential

Tesco Plc shares leapt to a new high on a newspaper report that it was looking to extract more value from its property assets, but Britain's biggest retailer said yesterday it had no immediate plans.

"We are always looking at the different possibilities and of course we won't rule anything out, but there is nothing major on the cards right now," Tesco spokesman Jonathan Church said.

Tesco shares jumped almost five per cent to a new high of £3.51 in early trade after the Daily Telegraph quoted Finance Director Andrew Higginson as saying the supermarket giant would look at placing its £12 billion freehold property into a real estate investment trust (REIT).

This would allow Tesco to place its property into a separately quoted vehicle and use money raised from selling shares in that entity to buy back its shares, the paper said.

"We're obviously interested (in REITs) in the sense that we're a big property company," the Daily Telegraph quoted Tesco's Higginson as saying. "We've got people looking at whether it's a good idea."

The government set out the terms for REITs in its annual budget last week, with a view to introducing them in January.

It proposed that REITs will be quoted property vehicles which distribute 90 per cent of their income to shareholders in return for not paying any corporate tax. A charge of two per cent of gross assets will be levied on creation of the REIT.

"This should certainly refocus investor attention on the very strong asset backing which Tesco enjoys," Numis Securities analyst Steve Davies wrote in a research note.

Private equity firms have long been attracted to buying retailers to tap the value of their property portfolios and store groups are increasingly looking at ways of extracting value themselves.

Earlier this week, rival supermarket group J Sainsbury Plc sold two mortgage-backed securities worth £2.1 billion. It used the proceeds to buy back £1.7 billion of outstanding bonds and wipe £350 million off its pension deficit.

"We estimate that Tesco has capacity to comfortably put £9-10 billion of property into a REIT, generating around 6 billion pounds in proceeds for share buy-back and then spin off the REIT directly to existing Tesco shareholders," analysts at Goldman Sachs wrote in a research note.

Tesco would then lease back the property from the REIT at market rates for 20 to 25-year terms, they suggested.