In its biggest ever takeover, Tesco announced yesterday that it will pay W1.95 trillion ($1.86 billion) in cash for Homever's 36 discount stores owned by Korean fashion retailer E-Land Group.
Tesco, which also agreed to take responsibility for Homever's debt, did not use a bank advisor, while E-Land was advised by Citi.
The purchase is being made through the UK retail giant's South Korean unit, Home Plus, which already operates discount stores in a joint venture with Samsung Group (Tesco has a 95% share of the JV) and is the second largest discounter in Korea. The deal will help it compete with Shinsegae and Lotte Shopping in Asia's fourth-largest economy, by doubling the number of stores that Tesco has in Seoul. According to the company, 20 of the hypermarkets covered by the deal are in the Greater Seoul and Gyeonggi metropolitan area.
The transaction brings to an end an unhappy association between E-Land and Homever. E-Land bought Korea's fourth biggest discounter back in 2006 from French retailer Carrefour for $1.85 billion, but it posted a W200 billion net loss last year. E-Land had re-designed the unpopular warehouse-style stores and given them a new brand name. But labour unrest over contract workers disrupted operations at some of its outlets and created a public relations disaster. European private equity fund Permira came to the rescue earlier this month, agreeing to pump W400 billion into the ailing subsidiary—although that deal will now not take place.
Earlier in the week, rumours had circulated that Tesco might pay as much a W2.3 trillion for the stores, while the shares of rival companies fell sharply. Nevertheless, the transaction marks the biggest inbound cross-border M&A deal in Korea so far this year and the eighth largest ever. It pushes Korean inbound cross-border volume to $2.8 billion from 22 deals, up 48% from the same period last year, according to data-provider, Dealogic. It is also the second largest Korean M&A deal this year, just behind Eugene Group's purchase of Himart from Affinity Equity Partners for W1.95 trillion, which was completed at the end of January.
Tesco entered Korea in 1999 and the country is now its most profitable overseas market. The company is continuing to expand outside the UK as profits from its local market, in which it is dominant, come under pressure as consumer spending falls, and also as the government threatens to restrict further domestic expansion. But it is one of the few foreign companies in the sector to stay in Korea, let alone grow. Carrefour and Walmart, for instance, have already given up competing with market leader E-mart, which is owned by Shinsegae, and decided to focus on China instead.