Tesco U.S. Exit Could Cost $382 Million in Cash, Shore Estimates

Tesco Plc’s exit from its unprofitable Fresh & Easy U.S. business may cost the U.K.’s largest grocer about 250 million pounds ($382 million) in cash, Shore Capital estimates.

While Tesco would face a 1 billion-pound writedown on the U.S., according to a Telegraph report, the “greater area of interest is the cash costs from exit, given most investors will have already anticipated the paper adjustment to the asset base,” Shore analyst Clive Black wrote in a note to investors.

Tesco Chief Executive Officer Philip Clarke is reviewing all options for the U.S. stores and has said he will report on the progress at the company’s results on April 17. While Aldi is seen as one of the potential buyers, a closure of Fresh & Easy and then a piece-by-piece sale of the assets remains the most likely outcome, the Telegraph reported today, without saying where it got the information.

Under Clarke, Tesco also paid 40 million pounds last year to offload a 50 percent stake in its Japanese unit, after deciding to refocus on its domestic business. Tesco’s market share at home has been squeezed by discounters like Aldi and more upmarket supermarkets like Waitrose and J Sainsbury Plc.

Spokespeople at Tesco weren’t immediately available to comment. Tesco shares rose as much as 4.05 pence, or 1.1 percent, to 373.10 pence as of 11:06 a.m. in London trading. The stock is up 11 percent this year, giving the company a market value of 30 billion pounds.

U.S. Investment

Tesco has invested about 1 billion pounds in the U.S. since creating the business in 2007, targeting the West Coast with a series of neighborhood urban stores in a market dominated by big-box supermarkets. Fresh & Easy distinguishes itself with a focus on budget-priced, healthy food and a predominance of own-brand items. Getting the business to produce an acceptable return would take too long, Clarke said in December.

Leaving the U.S. could cost Tescoanything between nothing and 500 million pounds, Shore’s Black estimates, depending on store disposals, the sale of the Riverside, California, distribution center and three adjacent food factories, the closure of the Los Angeles head office and associated redundancy costs.

While the exit would represent a blow to Tesco’s reputation, “the balance sheet can handle the hit,” Black said, adding that Tesco’s earnings-per-share will benefit “from the removal of the drag of U.S. losses.”

In April 2012, Clarke pushed back a goal for Fresh & Easy to reach break-even until fiscal 2013 and vowed to slow store openings and focus on getting each store to profitability. Fresh & Easy’s same-store sales rose 1.8 percent in the third quarter, worse than the prior quarter’s 6.9 percent growth.

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