Tesco Plc investors want the UK’s largest retailer to bid for Carrefour SA’s Southeast Asian supermarket assets. Just not at the indicated price.
Carrefour is seeking offers for its units in Malaysia, Thailand and Singapore and Tesco is among the possible buyers, people familiar with the matter said last week. The combined operations may fetch US$800 million to US$1 billion, they said, a valuation that according to RBS analyst Justin Scarborough would be too high for any bidder.
“If Tesco keep putting money into their strong markets, and Thailand is clearly one, then that would be grand,” said Phil Doel, an investment manager at F&C Asset Management in London, whose funds hold about 1 per cent of Tesco shares. “It depends on price and the return they can get.”
Tesco generates about a third of sales outside the UK, where growth is slowing amid heightened competition and easing inflation. Asia accounts for about 15 per cent of the retailer’s revenue and is its fastest-growing division by earnings, which rose 24 per cent last year. Tesco plans to add 4.9 million square feet of new store space in the region this year.
Tesco spokesman Tom Hoskin declined to comment on whether the Cheshunt, England-based retailer would make offers for the Carrefour stores. Florence Baranes-Cohen, a spokeswoman for the French supermarket company, also declined to comment.
Carrefour’s 39 Thai hypermarkets and one convenience store generated 598 million euros (US$756 million) of net sales last year. Total revenue reached 329 million euros in Malaysia, where Carrefour has 19 hypermarkets, and 85 million euros in the two- outlet Singapore division, the annual report shows.
‘Rich Price’
A price of US$1 billion would be about 0.8 times sales.
“It seems like a very rich price,” said Caroline Gulliver, an analyst at Execution Noble in London. “The market typically values food retailers at around 50 per cent of sales, not 80 per cent.” Carrefour paid 0.55 times sales for Brazil’s Atacadeo discount grocery chain in 2007, Gulliver said, adding that Tesco doesn’t “usually over-pay for assets.”
“You would need a very big synergy for any transaction at the prices mooted the other day to make any financial sense,” said RBS’s Scarborough.
In addition to Tesco, Japan’s Aeon Co, Hong Kong’s Dairy Farm International Holdings Ltd and Thailand’s Big C Supercenter Pcl may make bids for the Carrefour assets, three people familiar with the matter told Bloomberg last week. Spokespeople at all the companies declined to comment.
Tesco Lotus
Carrefour chief executive officer Lars Olofsson told shareholders at its annual meeting in May that the Paris-based retailer is “obliged” to listen to offers for its business in markets where leadership is unattainable. Asia is the retailer’s smallest division, accounting for 7.5 per cent of net sales.
Tesco doesn’t break down its figures by individual country. Revenue at the Asian unit, including operations in Thailand, Malaysia, China, Korea, Japan and India, climbed 20 per cent to 9 billion pounds last year. Tesco has no presence in Singapore.
Tesco Lotus, the UK company’s Thai unit, increased profit by more than 10 per cent last year. In Malaysia, Tesco became market leader after the 2006 purchase of Makro Cash & Carry stores, which almost doubled its selling space there. The grocer plans to step up openings to boost space in the country by 27 per cent this year, including seven hypermarkets.
Past transactions involving Tesco and Carrefour included the 2006 transfer of some Tesco stores in Taiwan for Carrefour outlets in the Czech Republic and Slovakia. The Slovak government later banned Tesco from buying the assets as it would have given the UK retailer excessive market power.
‘Strategic Sense’
Homever, the South Korean discount chain acquired by Tesco, was previously owned by Carrefour. Tesco paid about 1.3 times sales for Homever in 2008 because the business had high margins and came with “significant property assets,” said James Anstead, an analyst at Barclays Capital in London. Carrefour’s Asia assets probably have lower margins than the group, he said.
“Growth in the next decade is going to come from southeast Asia and China, not Europe and America, so putting capital into high growth areas makes strategic sense,” said Andy Lynch, who manages about US$1.9 billion at Schroder Investment Management, including Tesco shares. “The question is, at what price?” -- Bloomberg
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