Retailer Tesco sells South Korean arm 'Homeplus' to private equity firm MBK Partners

British retailer Tesco has announced that it will be selling its South Korean arm, Homeplus, to a private equity firm MBK Partners in an all cash deal of $6.1 billion (AU$8.78 billion). Announced on Monday, the deal also signaled the British supermarket’s retreat from leading foreign markets to set right its troubled domestic business in Britain.

The 96-year-old group posted one of the biggest losses in British corporate history, when it wrote off 7 billion pounds (AU$15.44 billion) of losses in April 2015. The consortium of investors buying the retail assets will be led by MBK and include the Canada Pension Plan Investment Board, Public Sector Pension Investment Board and Temasek Holdings, reports Reuters.

The sale of Homeplus in Korea, which is Tesco’s largest overseas asset, is a major divestment for Tesco and a bold decision by CEO, Dave Lewis, who sees the key to restructuring lies in slashing debt and reverting to a fair credit rating. Homeplus has 140 hypermarkets, 375 supermarkets and 327 convenience stores. The deal will now require the approval of Tesco shareholders and regulators and may be finalised by the fourth quarter of 2015.

“This sale realizes material value for shareholders and allows us to make significant progress on our strategic priority of protecting and strengthening our balance sheet,” said CEO Dave Lewis.

Eroding profit

Tesco’s profits had been eroding with the expanding market shares of German discounters Aldi and Lidl across the British market. Adding to it was the baggage of an accounting scandal that Tesco faced in its own backyard.

The selloff in South Korea mirrors Tesco's other costly exits from markets such as Japan and the United States and the limited exposure in China. The deal also highlights the difficulty faced by many Western retailers in managing business beyond their home markets.

Costly deal

This largest-ever private equity transaction in Asia will have Tesco receiving US$6.1 billion (AU$8.7 billion) in cash. After adjusting for tax and transaction costs, the net cash proceeds will be around 3.35 billion pounds (AU$7.3 billion). Bernstein analyst Bruno Monteyne, said the deal would now allay fears that Tesco had to seek cash from shareholders to secure its balance sheet.

Moody’s indicated that Tesco’s rating would improve if the operating performance of its U.K. business shows signs of promise, the Wall Street Journal reported. According to Kantar, a research firm on retailers, Tesco’s market share is down at 28.3 percent from 28.8 percent, in the three months that ended on Aug. 16.

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