However, it may be confusing for some investors as to why the FTSE 100 supermarket chain is considering selling off its fastest-growing segment, which in its last set of half-year results reported sales growth of 8.4%, much faster than its core UK operation at 0.1% in the same period.
An offer you can’t refuse?
Tesco’s decision to sell off what some consider to be ‘the jewel in the crown’ of its operation, the decision to exit Asia may have some backing.
The company has been retreating from the international stage for a number of years, pulling out of the Chinese and South Korean market in 2015 and then Japan one year later, leaving its existing stores on the continent located in Thailand and Malaysia.
With these decisions still in recent memory, it has been suggested that a local player has approached Tesco with an offer at a higher premium to its internal valuation, or at least one that offers better returns than keeping the operation in its current state.
“Local operators can often be better at making business work more efficiently…if they think Tesco’s footprint and growth is appealing, they may be willing to put down a bid at a higher valuation than the value of the operation on Tesco’s balance sheet”, says analyst Andrew Ford at Peel Hunt.
Although international growth can be faster than its home market “it is not what Tesco are focusing on…they’ve definitely changed their intention”, Ford says.
The result is that despite its fast growth, the Asian operation contributed less than 10% of Tesco’s sales in its latest half-year, leaving it as a non-core business the retailer may want rid of given its record in the region.
Investors are often easily placated by any big management decision if one of the potential benefits is a big pay-off.
Analysts at HSBC estimate that Tesco could achieve a price of around £7bn for the business, from which it will net around £5bn.
If Tesco managed to gain that amount from the sale, HSBC’s analysts said that the influx of cash will “imply the potential for significant shareholder returns”.
“Obviously, if Asia was sold for £7bn it would be transformative for Tesco's balance sheet and would raise the possibility of a significant amount of excess cash being returned to shareholders,” HSBC said.
Investors will probably get the cash via special dividend given the scale of the potential transaction, the analysts said.
Everything on the UK
However, if the Asia business is sold off, this would have the added effect of piling pressure on Tesco, and its incoming chief executive Ken Murphy, to revive the momentum of the UK grocery operation.
“Europe is never likely to contribute positively to the investment case in a meaningful way until it is sold, leaving the focus resting on the UK business”, HSBC said.
In this case, Murphy would need to “drive the UK business harder and improve growth” in order to make up for the lost revenues from Asia, meaning the Irishman, who starts next summer, may be keen for the group to hang on to the Thai business a while longer.