As UK investors reel from the shock of one time blue chip investment Tesco posting a massive profit downturn, Asian investors look set to be the winners should the retail goliath float its Asian operation.
A raft of senior management of Tesco have been suspended after a whlstleblower uncovered a £250 million ‘black hole’ in the company’s books, hidden from shareholders. That has now grown a further £10 million, at least.
The company’s chairman fell on his sword this week stressing the need for a fresh management team to resolve the issue and stop the rot.
Tesco has been hammered in its home market, losing market share to discount rivals Aldi and Lidl and even to upmarket brand Waitrose. But the real damage has been caused by what Sky News described as “accounting chaos” which led to the reporting of a 92 per cent fall in first half profits this week.
Incoming CEO Dave Lewis is believed to be increasingly open to a proposal to float the Asian operations of Tesco, which could raise as much as 10 billion pounds, yet keep the Tesco operation intact, allowing the company to maintain a stake in the business and preserve its international network.
Tesco’s largest international businesses are in Thailand and South Korea and it has a strong presence in Malaysia. It has 1700 stores in Thailand, ranging from convenience stores to hypermarkets branded Tesco Lotus – and 400 in South Korea (branded Homeplus).
According to a report in The Guardian newspaper in London, analysts at HSBC estimate it will cost £3 billion to turn around Tesco’s UK business, taking into account investment in lowering prices, hiring more staff and boosting the quality of the company’s food.
Funding such an investment at a time the company’s share value is under such pressure could be most easily achieved by spinning off a majority stake in the more successful Asian operations. Borrowing is an unlikely course with Moodys assessing Tesco’s ability to raise finance as just two steps short of ‘junk’ rating.
An Asian IPO is not a certainty at this stage. Another option for raising capital would be to spin off the Clubcard operations in the same way some international airlines have spun off their loyalty programs.
