Tesco Plc, (TSCO) the U.K.’s largest retailer, said it will sell a 50 percent share in its Japanese unit to Aeon Co. (8267) and invest 40 million pounds ($63 million) in the business to end a nine-year foray into the Asian nation.
Aeon, Japan’s biggest retailer, will pay a “nominal sum” for joint control of Tesco Japan in a deal that the U.K. company said will leave it with no further financial exposure to the country. Tesco’s investment will help fund restructuring and is the second part of a process that will lead to its exit of the country, it said today.
“Without some serious M&A, they were never going to reach the scale required to create a profitable business in what remains one of the most competitive markets on earth,” said Bryan Roberts, an analyst at Kantar Retail. “It makes sense to pull out and this seems a dignified way of doing it.”
Global retailers are jettisoning peripheral assets as a slump in consumer spending linked to the debt-crisis leads them to focus on their main regions. Carrefour SA (CA) last week agreed to sell its stake in a Greek joint venture and new Chief Executive Officer Georges Plassat said today it may exit Turkey and cede control in Indonesia.
The Japanese division, which includes the Tsurakame format, is Tesco’s smallest international retail business and has a market share in Japan of 0.1 percent. Tesco entered Japan with 76 stores after the purchase of the C Two-Network Co. grocery chain in July 2003 and now has has 117 outlets in the area of Greater Tokyo. The retailer said in August last year that it planned to exit the country to concentrate on winning back consumers in its home market, where same-store sales have declined for four straight quarters.
Aeon will probably buy the stake in the joint venture in Japan’s autumn, Koji Tsusue, a spokesman for the Tokyo-based company, told reporters today, without disclosing terms.
The acquisition adds to two regional grocers Aeon bought last year amid a recovery in demand after the 2011 earthquake. The purchases of Marunaka Co. and Sanyo Marunaka KK helped the company expand in the western part of the country.
“Tesco Japan’s stores in metropolitan areas are the part that looked most attractive,” Tsusue told reporters in Tokyo. “Aeon sees metropolitan areas as a pillar of growth.”
The purchase probably won’t have much impact on Aeon’s sales and profit, said Mikihiko Yamato, deputy head of research for JI Asia in Tokyo.
In 2010, Tesco wrote down the goodwill for the Japanese assets to zero on an impairment loss, compared with 55 million pounds a year earlier, its annual report showed.
Today’s move isn’t the first time Tesco has pulled out of an Asian nation. The company exited Taiwan in 2006 as part of an asset swap with French grocer Carrefour SA for outlets in the Czech Republic and Slovakia. The Slovak government later banned Tesco from buying the assets on the grounds that it would have given the U.K. retailer excessive market power.
Tesco will now focus on its larger businesses in Asia, where it has stores in India, China, Thailand, Malaysia and South Korea, its second-largest market after the U.K.
The grocer generates about a third of revenue outside the U.K., with Asia accounting for 16.8 percent of sales last year.
“The exit from Japan leads to the removal of a distraction and a potential source of substantial capital absorption,” Clive Black, an analyst at Shore Capital, said in a note.