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April 17, 2013

On the money: Tesco mulling offers for Fresh & Easy unit

UK retail giant Tesco said it has received its first set of offers from prospective buyers for its US Fresh & Easy chain after confirming it will now exit the market.

UK retail giant Tesco said it has received its first set of offers from prospective buyers for its US Fresh & Easy chain after confirming it will now exit the market.

The UK’s largest retailer, which launched a strategic review of its loss-making US Fresh & Easy venture last year, this morning (17 April) confirmed it would leave the US. The announcement was made as it revealed a drop in annual profits.

CFO Laurie McIlwee told analysts the sales process was “going well” and that the business had generated “a lot of interest”, the bulk of which was in buying the venture whole.

“Two weeks ago we received our first set of indicative offers from prospective buyers. Encouragingly, there are a number of organisations that want to buy the business in its entirety, so those are the ones we’re pursuing with earnest.”

The offers Tesco has received will mean the group can exit the US without any further cash investment in the country, McIlwee said. “Of course, we do make a trading loss, but we will have to support the trading loss from now until we actually sell the business.”

McIlwee said that if the business is bought as a whole, there will be no issue of redundancy. He added: “We’ve really only just got a feel for people’s interest and the value that they’re placing on our business very recently and therefore it’ll be at least another three months before we’re able to conclude this.”

Tesco had announced in December it was likely to quit the US after confirming it was reviewing its options for the Fresh & Easy business. Clarke had blamed the impact of the “unprecedented crisis” in the states the retailer had targeted on the West Coast.

In October last year, Tesco reported a 5.2% increase in half-year like-for-like sales in the US, excluding fuel. The trading loss from Fresh & Easy, however, stood at GBP74m, 1.4% lower than a year before. The business unit was excluded from its annual results today.

Chief executive Phil Clarke told analyst this morning that Tesco had “fought hard” in the US but concluded that the group could deliver better shareholder returns by leaving rather than staying.

“We can deliver better value to shareholders by applying our focus in other markets, not least our home market. But that doesn’t mean, by the way, that we want to be going into more investment in our other international businesses. I think we’re now in the right international markets for long-term growth.”

As well as its exit from the US, within months of taking the helm from Sir Terry Leahy last year, Clarke announced plans to quit Japan. Speaking to analysts today, the chief executive said there were no plans to exit any other markets at the present time.

“We are out of the markets I didn’t think would be able to provide the right blend of growth and returns that I wanted to deliver for shareholders. I don’t believe it will be necessary to exit any others.”

In addition to facing pressure to exit the US, Tesco has had to deal with problems in its domestic market. As a result, last year Clarke set out plans to invest GBP1bn in revitalising Tesco’s UK business.

The chief executive said this morning that the UK remains “absolutely fundamental” to the success of the group, adding that the UK turnaround plan is “on-track”.

In the UK, sales increased by 1.8% to GBP48.22bn in 2012. Like-for-like sales, however, fell 0.4% and trading profit was down 8.3% to GBP2.27bn.

Clarke said Tesco will be pursuing a “three-pronged approach” to growth in its domestic market. This, he said, will include investing in the UK business to make it “as good as it can possibly be”, in addition to “asserting our position as a multi-channel retailer”. He added that Tesco will also be pursuing “disciplined growth internationally” in markets where it feels it can “make a difference”.

“I am pleased we made good progress but there is still a massive opportunity. There is much more to come in the year ahead. We plan to relaunch Tesco Finest later this year and continue to refresh more stores with an emphasis on fresh … we are creating a more tailored offer, a more attractive environment.

“I am really determined that Tesco will be the most accessible retailer and this will be critical for our future success. We have the capability and ambition to be multi-channel retailer of choice in every market we operate.”

Tesco shares were down 3.3% at 372p at 12:57 BST.

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