Tesco is selling its South Korean arm to a group led by private equity firm MBK Partners for £4 billion, it said yesterday.
The sale of Homeplus, its largest overseas asset, represents the first large divestment by Tesco boss Dave Lewis, who wants to slash debt and rid the firm of its junk credit rating.
It follows Tesco’s costly exits from Japan and the US, as well as a reduction of its exposure to China, under previous management and highlights the difficulty Western retailers have had away from their home markets.
Tesco has agreed to sell Homeplus to investors led by MBK and including the Canada Pension Plan Investment Board, Public Sector Pension Investment Board and Temasek Holdings.
“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 Lewis, a former Unilever executive who was hired to lead Tesco’s turnaround.
Under the terms of the largest ever private equity transaction in Asia, Tesco will receive £4 billion in cash. After adjustments for tax and transaction costs, the net cash proceeds, to be received in a combination of US dollars and Korean won, will be around £3.35 billion.
Tesco said the Homeplus disposal would reduce its total indebtedness by £4.225 billion.
However, the deal will remove a business that contributed around 150 million pounds to annual earnings.
“[The] price looks OK,” said one major Tesco shareholder. “I suspect that despite the earnings dilution the market will take a positive view of the deal as it strengthens the balance sheet.”
Shares in Tesco, down 19 per cent over the last year, slipped 0.3 per cent by 0951 GMT after an initial rise of up to two per cent.
Tesco will use the proceeds to redeem upcoming bond and commercial paper maturities. It will also consider the purchase of some UK leasehold stores.
The sale comes after the group announced in April one of the biggest losses in British corporate history, hit by a £7 billion 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 2015-2016 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 2017-2018.
Completion of the disposal, is expected during the fourth quarter of 2015. 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.