Tesco's South Korean unit stacks up for a buyout

E-Mart

08/06/2015 09:02

(The author is a Reuters Breakingviews columnist.  The opinions 
expressed are his own.) 
    By Quentin Webb 
    HONG KONG, June 8 (Reuters Breakingviews) - Tesco's  TSCO.L  
South Korean unit stacks up for a buyout. Reuters says Britain's 
biggest grocer has hired HSBC to help it sell its Homeplus 
business for some $6 billion. A disposal would do much to fix 
the British grocer's strained balance sheet. Tesco might not 
miss the Korean earnings that much either. 
    Private equity heavyweights including Carlyle  CG.O , CVC, 
and TPG are likely suitors. Homeplus occupies a strong position 
in one of Asia's richest markets, as the second-largest of three 
major food retailers.  
    The potential to generate cash from property may be a draw: 
Homeplus owns many of its own stores and adjacent malls, and has 
already concluded two sale-and-leasebacks. KKR's  KKR.N  
lucrative stint owning Oriental Brewery showed the Korean 
consumer can be a goldmine. 
    That doesn't mean Tesco can expect to get a huge price. In 
February Morgan Stanley analysts pencilled in 3.8 to 5 billion 
pounds ($5.8 to $7.6 billion) for Homeplus - roughly 7 to 8.5 
times this year's EBITDA plus a 15 to 25 percent "control 
premium". The lower end seems more likely. 
    That's partly because Homeplus has headaches that will be 
eerily familiar in Tesco head office. There is a political and 
consumer backlash against big-box stores. A longstanding boss - 
founder Lee Seung-han - has recently left the business. And 
margins have fallen: earnings before interest and tax will be 
5.4 percent of sales this year, Morgan Stanley reckons, down 
from 8.2 percent in 2012. 
    Moreover, the political heat around the sector may deter the 
trade buyers who could afford to pay most for Homeplus, direct 
rivals Lotte Shopping  023530.KS  and E-Mart  139480.KS . 
Foreign shopkeepers are unlikely buyers too. Both Wal-Mart 
 WMT.N  and Carrefour  CARR.PA  have already left Korea. Maybe 
another of Korea's powerful "chaebol" conglomerates could step 
in, despite lacking synergies: the department-store owning 
Hyundai  011760.KS , perhaps.  
    All that said, Homeplus presents a rare opportunity for 
private equity in Asia. Real control of multi-billion-dollar 
businesses seldom comes up for grabs. Tesco, which has 
junk-rated debt, also has a strong motive to sell. 
     
     
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    CONTEXT NEWS    
    - Tesco, Britain's biggest retailer, has hired HSBC to 
explore a sale of its South Korean operations, valued at about 
$6 billion, Reuters reported on June 4, citing people familiar 
with the matter. Tesco and HSBC declined to comment. 
    - The Homeplus division has attracted several bid enquiries 
in the past, which has encouraged Tesco to explore a formal sale 
process, the sources told Reuters. They added that global buyout 
firms KKR & Co, Carlyle Group, CVC Partners and TPG Capital 
Management as well as Asian buyout firms including MBK Partners 
were likely bidders for the business. 
    - Reuters: Tesco hires HSBC to explore sale of $6 bln 
S.Korea arm-sources ID:nL3N0YQ344  
     
     
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 (Editing by Robert Cole and Robyn Mak) 
 ((quentin.webb@thomsonreuters.com)(Reuters 
messaging:)(quentin.webb.thomsonreuters.com@reuters.net)) 
 
Keywords: TESCO SOUTHKOREA/SALE BREAKINGVIEWS