Tesco Says Any China Deals Will Go Through New Retail Venture

Tesco Plc, the U.K.’s largest retailer, said any deals in China will be funded through its new joint venture with state-backed China Resources Enterprise Ltd.

The largest U.K. retailer yesterday said it will pay HK$4.33 billion ($558 million) to gain 20 percent of a venture with China Resources to extend its reach in the world’s most populous nation.

“Any retail business that starts in China, that’s either acquired or developed, will be part of the joint venture,” Tesco Chief Financial Officer Laurie McIlwee, who will join the board of the tie-up, said in London yesterday. “The acquisition, if there was an acquisition, will be financed through the debt of the business because the two businesses will be brought together both cash-and debt-free so there is huge debt capacity in the combined joint venture.”

China Resources, the Hong Kong listed retail and beer conglomerate, in August said that it may partner with Tesco to bid for billionaire Li Ka-shing’s ParknShop, one of the two largest grocer chains in Hong Kong’s $6.6 billion supermarket industry. The Chinese company’s Chief Financial Officer Frank Lai yesterday declined to comment on the progress for a bid for ParknShop “because there is a process going on. ” Hutchison is seeking $3 billion to $4 billion for the unit, a person familiar with the sale said earlier this year.

China Resources fell 1.2 percent to HK$24.70 at 10:39 a.m in Hong Kong trading today, while Tesco fell 0.3 percent to 358 pence in London yesterday.

Tesco Venture

Tesco will combine 134 outlets and shopping-mall business in China with the almost 3,000 stores owned by the state-backed conglomerate in China and Hong Kong in a tie-up announced in August. The two companies plan to run supermarkets, convenience stores and liquor shops in the Greater China region. China Resources will hold 80 percent of the venture.

The deal would allow Tesco to expand in China’s $574 billion hypermarket industry while ending almost a decade of independent operations as sales fall amid competition from rivals such as Sun Art Retail Group Ltd. China Resources, which runs the country’s second-largest hypermarket business, would gain from Tesco’s expertise in areas including private labels, e-commerce and international sourcing, the companies said.

Board Seats

Tesco will have two out of a maximum of 10 seats on the board of the venture, whose annual sales are estimated at 10 billion pounds ($16 billion), the Cheshunt, England-based company said. Completion of the deal is expected in the first half of 2014, subject to regulatory and shareholder approval.

In addition to hypermarkets, Tesco owns 11 Lifespace shopping malls in China and eight in 50-50 joint ventures with local partners.

The U.K. retailer is exiting international markets after almost two decades of overseas expansion took the focus off its home base. Tesco agreed in June 2012 to pay 40 million pounds to leave its Japanese joint venture, and said last month that it was exiting the U.S.

Tesco started selling goods in China in 2004 and generated 1.4 billion pounds of sales in the country last fiscal year, according to its website. Sales for its China stores open at least a year dropped 4.9 percent in the first quarter amid consumer concern over bird flu and weaker demand for pork after a national food safety scare.

Profit Plunge

The U.K. company reported yesterday that same-store sales declined in all nine markets and Europe profit plunged in the first half.

China Resources and Wal-Mart Stores Inc. are tied for second place in the country’s hypermarket industry with an 11 percent share each last year, according to Euromonitor International. Sun Art Retail Group Ltd., backed by France’s Groupe Auchan, was the market leader with 14 percent, while Tesco ranked eighth with 2.4 percent.

Revenue in China’s hypermarket industry will probably expand to 864 billion yuan ($141 billion) by 2015, a 50 percent gain from last year, according to Euromonitor.

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