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September 11, 2013

Comment: Tesco’s US misadventure has apt final chapter

After six years of losses, there will be a sense of relief that Tesco has secured a deal to exit the US. However, the agreement with Yucaipa provides a suitable closing chapter for the failed foray.

By Dean Best

After six years of losses, there will be a sense of relief that Tesco has secured a deal to exit the US. However, the agreement with Yucaipa provides a suitable closing chapter for the failed foray.

Yesterday (10 September) evening, Tesco announced a deal for Fresh & Easy with Yucaipa, the investment vehicle set up by US billionaire Ron Burkle.

It is though a transaction Tesco was unlikely to have been looking for when it confirmed in April it would quit the US after four months reviewing its options for the business.

By taking on 150 of the circa 200 outlets, Yucaipa has evidently not been convinced about the entire Fresh & Easy business. Moreover, the fund is not paying a fee for the assets it does buy.

In fact, the deal will cost Tesco GBP150m. Tesco is loaning Yucaipa GBP80m and said the cost of that, plus charges from the closure of stores not taken by the fund and other expenses, would lead to a “total cash outflow [of] no more than GBP150m”. Tesco said the deal includes warrants that it could exchange for a stake of up to 32.5% in YFE Holdings, the Yucaipa affiliate through which the transaction is being made.

CEO Philip Clarke insisted the transaction “represents the best outcome for Tesco shareholders and Fresh & Easy’s stakeholders”. He added: “It offers us an orderly and efficient exit from the US market, while protecting the jobs of more than 4,000 colleagues at Fresh & Easy.”

Tesco’s shareholders will indeed breathe a sigh of relief that the US misadventure is set to come to an end after a reported GBP1bn of investment and then the GBP1bn write-down on Fresh & Easy, announced in April.

Fresh & Easy has been seen as a drain on resources at a time when Tesco has been battling stiffer competition in the UK, where its sales have fallen and its market share come under pressure.

However, the noises coming out of Tesco earlier in the year indicated at least competitive interest in Fresh & Easy, so the nature of the Yucaipa agreement will be disappointing.

“Whilst we welcome the announcement of the exit of Tesco from the USA, the outcome is not quite as sweet as management guided to at the group’s preliminary results in April 2013,” Shore Capital analyst Darren Shirley wrote in a note to clients today. “At that time there was the expectation that Tesco would have a single buyer for Fresh & Easy and that no additional cash costs would be required, noting the circa GBP1bn write-down of the assets, bar the trading losses incurred until the time of completion.

“Whilst not a game changer in the big scheme of things, the sale process has dragged on longer than we expected, so adding to ongoing trading losses. We expect those trading losses, which will be treated as discontinued in the forthcoming interim results update, to be little short of GBP100m; taking into account the completion time further losses can be expected in H2.”

Shirley, however, says the exit from the US, alongside the departure from Japan, and the potential reduced exposure to China does demonstrate Tesco’s “capital discipline” under Clarke. It also, the analyst notes, allows the retailer more time to focus on a UK business that needs “further care and attention”.

With the US problem apparently solved, investor attention will now turn firmly to the UK.

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