In more ways than one, it seems.

Photographer: Simon Dawson/Bloomberg

Tesco: Tempting a Takeover?

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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Tesco Plc has lost half its market value in the past year. The stock declined almost 8 percent today, erasing a November rally, after the grocer halved its full-year earnings forecast. At some point, Tesco might just become cheap enough to become a takeover target.

Here's a chart showing what's happened to Tesco's enterprise value, a proxy for takeover value that counts market capitalization, preferred equity and debt less cash and equivalents, based on its annual reports and current financials:

At an enterprise value of 23 billion pounds ($36 billion), Tesco isn't exactly cheap. It's still losing market share, particularly to the German discount retailers Aldi and Lidl. It's in the middle of a price war, hence today's announcement that its full-year trading profit won't exceed 1.4 billion pounds, about half of what it predicted as recently as August.

It's still being investigated by the Serious Fraud Office after revealing in September that it overstated the income it gets from suppliers for prioritizing their products. And it owes bondholders almost 14 billion pounds, about the same as its current stock-market value.

Britain's supermarket industry is overdue for consolidation. It's been 15 years since Wal-Mart Stores paid almost $11 billion for Asda. It's been a decade since billionaire Philip Green dropped his 9.1 billion pound attempt to buy Marks & Spencer Group. Green also made a run at Safeway Plc when it was the U.K.'s fourth-biggest grocer, dropping his bid in October 2003 and making way for WM Morrison's 2.9 billion pound offer. Tesco itself had considered a bid for Safeway in 2003.

An industry in turmoil typically offers opportunities. Crystal Amber Fund, an activist shareholder, is talking to overseas investors about buying shares in J Sainsbury, the Sunday Telegraph recently reported. Sainsbury's market cap is about 4.4 billion pounds after a 37 percent drop in its share price this year.

Even if Tesco doesn't tempt a takeover, its future would seem to hold two certainties. Chief Executive Officer Dave Lewis said in October he wasn't working on a rights offering to boost the company's equity, although he did add "you never say never.'' A move to tap shareholders for cash seems more likely.

 A credit-rating downgrade also seems unavoidable. In October, Moody's cut Tesco to Baa3, and left it on review for a further reduction that would drop it into junk status. Today's announcement that earnings will be half what was previously promised seals Tesco's fate as a junk-rated borrower. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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