Shares in groceries goliath Tesco (TSCO) moved up 5% to 243.75p on news it has begun a strategic review of its Asia business after receiving an approach for the business from a mystery suitor.
Asia is a jewel in the Tesco crown, so any purchase would have to involve ‘substantial monetary sums’ and could result in ‘a material distribution to shareholders’ according to Shore Capital, although the broker also points out a disposal would also leave Britain’s biggest retailer ‘devoid of a growth piston in its engine’.
ASIA UNDER THE HAMMER?
One of Shares’ running Great Ideas selections and our pick of the three mainstream London-listed supermarkets, Tesco has received ‘inbound interest’ for its Asia operation.
As a result, it has ‘commenced a review of the strategic options for its businesses in Thailand and Malaysia, including an evaluation of a possible sale.
‘The evaluation of strategic options is at an early stage, no decisions concerning the future of Tesco Thailand or Malaysia have been taken, and there can be no assurance that any transaction will be concluded.’
Significantly, Tesco also failed to clarify whether the outcome of the review involves chief executive officer (CEO) designate Ken Murphy, due to take over from incumbent Dave Lewis next summer.
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Shore Capital’s well-followed scribe Clive Black pointed out that at Tesco’s capital markets day in June, Thailand in particular was held up as one of the grocer’s growth poles for the future. Six months later however, and the South East Asia businesses are subject to a surprise strategic review.
Lewis is leaving Tesco next year after saying he has completed the business turnaround, with designate CEO Murphy set to take over in the hot seat next summer. Striking a favourable deal in Asia would add another badge to Lewis’ reputation as the man who rescued Tesco and put it back on track.
Having joined Tesco in 2014, he has overseen a transformation in the grocer’s fortunes, cutting prices and jobs and master-minding the £3.7bn takeover of wholesaler Booker in 2017.
SELLING FROM A POSITION OF STRENGTH
Tesco’s last major Asian disposal was the £4.2bn sale of the Homeplus business in South Korea shortly after Lewis took control. But this was during a period in which Tesco needed to pay down debt.
Today, the supermarket’s financial constitution is stronger and the business is generating growing free cash flow that is enabling it to pay down debt, so Tesco is selling from a position of strength and will look to extract a fulsome price for its trophy Asia asset.
Black believes that ‘for any approach to be accepted by the Tesco board for Thailand then it needs to be highly attractive if not a knock out price’, potentially north of the Asian division’s £5bn of sales.
Russ Mould, investment director at AJ Bell, commented: ‘Tesco’s shareholders are unlikely to object to a potential deal to sell its stores in Thailand and Malaysia as long as it gets a decent price. After all, streamlining has been the general direction of travel for the group for some time.
‘The Asian operations accounted for 9% of group sales in the financial year to 23 February 2019 and 13% of group operating profit, so they are a decent contributor to the business.
‘Getting out while the going is good could help management to sharpen their focus on the UK where it seems to be finding its feet again after a difficult period including heightened competition.’
