Tesco May Extend Sale-and-Leaseback Plan to Overseas Assets

Tesco Plc (TSCO), the U.K.’s largest retailer, may extend a domestic sale-and-leaseback program to its international property assets to fund overseas expansion amid slowing sales growth at home, analysts said.

Tesco should be able to raise at least 1 billion pounds ($1.6 billion) a year from selling and leasing back outlets, while maintaining ownership of 70 percent of its properties, according to Chris Hogbin, an analyst at Bernstein Research in London. The retailer has reaped about 5.5 billion pounds in the past seven years from transactions involving only U.K. stores.

“Tesco has prime locations from Dublin to California,” said Clive Black, an analyst at Shore Capital in London. Extending the sale-and-leaseback program internationally “may demonstrate further the asset backing and high quality of Tesco’s global as well as U.K. estates.”

Chief Executive Officer Philip Clarke could extend Tesco’s sale-and-leaseback transactions to as much as 7 billion pounds in the next five years, Black estimates. Clarke, who took the helm at the Cheshunt, England-based retailer in March, needs to revive sales growth in the U.K., where a slowing grocery market has led to a 9.5 percent drop in the shares over the past year.

A spokesman for the retailer declined to comment. He asked not to be identified, citing company policy.

Tesco, the world’s fourth-biggest retailer, has been selling and leasing back its outlets since 2004. The proceeds have helped fund its global growth ambitions, including new shopping malls in China.

International Expansion

The retailer has outlets in 13 countries outside the U.K. including Ireland, the U.S., Czech Republic, Hungary, Poland, Slovakia, Turkey, China, Thailand, Malaysia, India, South Korea and Japan. It is opening 8.5 million square feet of new space this year as well as nine shopping malls in China.

Tesco valued its property assets at 34.6 billion pounds, according to last year’s annual report. That compares with the retailer’s market value of 32.7 billion pounds.

The retailer is due to report annual earnings on April 19. Net income climbed to 2.64 billion pounds in fiscal 2011, from 2.33 billion pounds a year earlier, according to the median estimate of 17 analysts compiled by Bloomberg.

“Philip Clarke is likely to sound a more cautious note on the U.K. outlook, but also to highlight the strong international opportunities,” James Grzinic, an analyst at Jefferies International Ltd. in London, wrote in a note.

‘Range Issues’

Tesco in January reported revenue growth that lagged behind competitors as customers bought fewer non-food items such as electronics. Sales at U.K. stores open at least a year rose 0.6 percent, including value-added taxes and excluding gasoline, in the six weeks ended Jan. 8, less than J Sainsbury Plc’s 3.6 percent. Non-food revenue declined 1.5 percent.

Tesco needs to refocus on the non-food business by offering a wider range of prices on products such as electronics, increasing the fashionability of its clothing and becoming less driven by price, according to Panmure Gordon’s Philip Dorgan.

“Non-food has range issues and is too far down-market,” Dorgan said. “We don’t think that Tesco needs to invest significantly in margin, but it does need to improve its non- food offer and its dialogue with its customers.” He has a “buy” recommendation on the shares.

Clarke has appointed Per Bank as the new U.K. commercial director of non-food and extended the members on the executive committee to tackle the growing size and scope of the business.

“Tesco’s new CEO is likely to have a busy agenda,” Justin Scarborough, an analyst at Royal Bank of Scotland, the company’s broker adviser, said in a report. “How the company plans to balance maturity in some parts of its business with growth opportunities elsewhere, how this is financed and how it can increase returns should be the headline areas of focus.”

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.

Enlarge image

Tesco May Extend Sale-and-Leaseback Plan to Overseas Assets

Andy Shaw/Bloomberg

The retailer has outlets in 13 countries outside the U.K. including Ireland, the U.S., Czech Republic, Hungary, Poland, Slovakia, Turkey, China, Thailand, Malaysia, India, South Korea and Japan.

The retailer has outlets in 13 countries outside the U.K. including Ireland, the U.S., Czech Republic, Hungary, Poland, Slovakia, Turkey, China, Thailand, Malaysia, India, South Korea and Japan. Photographer:Andy Shaw/Bloomberg