Shares in Tesco (TSCO) ticked up 3.85p to 372.95p in early trade today, as the global grocery behemoth confirmed talks are underway regarding a potential joint venture in the world's second-biggest economy.
In a short and sweet statement, the £29.7 billion cap flagged exclusive discussions with Hong Kong-listed China Resources Enterprise (0291:HK), 'CRE', to combine their Chinese operations and form a retail giant with sales of £10 billion.
Discussions appear to be at an advanced stage, as Tesco confirmed it would take a 20% stake in the joint venture with state-run CRE controlling 80% of the new chain.
Under the terms of the mooted tie-up, Tesco would combine its 131 China stores and shopping mall business with CRE's CR Vanguard business, which runs almost 3,000 stores across the Peoples' Republic and Hong Kong.
From Tesco's point of view, the planned partnership is consistent with chief executive Philip Clarke's strategy to focus on 'profitable routes to growth in fast-growing but less mature markets'.
An agreement would allow the grocery giant to reduce the amount of capital it must commit to its Chinese business and yet still retain a presence in this attractive market.
Tesco, which faces challenging conditions in many international arenas, is transforming itself into a more focused, highly cash generative and return on capital employed-driven entity under the stewardship of Clarke.
Following exits from Japan and the USA, the FTSE 100 retailer has called an end to the so-called 'space race', stating it would pare back spend on large multi-use developments and push ahead with its self-improvement plan in its core UK market.
In a bullish note published this morning, Jefferies International, with a 'buy' rating and 440p price target for Tesco, writes: 'Today's announcement confirms that our assumption for rational steps to be taken by the group is a sensible one. The Chinese dilution to the group's cashflow profile was probably the one that needed most urgent action (we assume that Tesco has invested a cumulative capex of at least £2bn between Chinese retail and malls), but we also believe a very similarly structured deal is available to the group in Turkey. Tesco's current valuation clearly ignores these opportunities.'
