Tesco Starts Talks on Turkish Unit After Report Seeking Partner

Tesco Plc’s Turkish unit Tesco Kipa said its parent company started negotiations over the future of the business amid speculation that the parent company may seek a combination with another local operator.

The U.K.’s largest grocer is in the “initial phase” of talks with “various companies on various options,” Tesco Kipa said today in a statement. The Financial Times reported Feb. 21 that Tesco is interested in partnering with Migros Ticaret AS over combining assets. Such a deal would mirror one that Tesco struck in China last year with China Resource Enterprises Ltd.

Tesco last year exited the U.S. and is under pressure to reduce its exposure to other international markets as Chief Executive Officer Philip Clarke seeks to revive sales in the U.K., which accounts for about two-thirds of revenue. Turkey was one of Tesco’s worst performing markets last year as the business lost ground to discounters like Birlesik Magazalar AS.

“It may be seen as a fast-growing emerging market, but Turkey is a super-difficult market for hypermarket operators and it’s one of Tesco’s most difficult international markets,” said Andrew Gwynn, an analyst at Exane BNP Paribas who estimates that the 191 stores there will lose as much as 50 million pounds ($83 million) this year.

Migros’s parent company BC Partners periodically evaluates alternatives, Migros said in a separate statement today.

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Tesco has operated in Turkey since 2003 and last year had revenue there of 745 million pounds. Sales at stores open at least a year fell 3.5 percent in the third quarter, an improvement on the 11 percent drop of the previous three months.

Executives at Tesco said in October they’re committed to fixing the international business. Still, Exane’s Gwynn said it’s likely the company will seek to reduce its “exposure to other underperforming markets such as Poland.”

Tesco will update investors tomorrow about its plans for reviving its U.K. business. The grocer may scrap its target for a 5.2 percent trading margin, according to analysts at Cantor Fitzgerald and Sanford C. Bernstein, as it seeks to fight back against growing competition from discounters.

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