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Tesco PLC Confirms Chinese Merger Plans

As well as reshaping its UK business in the last couple of years, Tesco (LSE: TSCO)  (NASDAQOTH: TSCDY.US) has been shaking up its international store portfolio. It is already in the process of exiting the US, and now it looks set to pull back in China as well.

Following numerous overnight press stories, Tesco this morning confirmed that it has entered into a Memorandum of Understanding with China Resources Enterprise, so that the two businesses can merge their Chinese operations.

Tesco said the joint venture would create a business with combined sales of around £10bn, with Tesco holding a 20% stake. China Resource Enterprise currently has some 3,000-odd stores across China and Hong Kong, while Tesco has 131 larger stores.

Although Tesco doesn’t specifically break out its total sales in China, it has seen negative like-for-like revenue growth there for four successive quarters now. What’s more, the decline has been getting steadily worse with each passing quarter. The last three months to the end of May showed a 4.9% decrease, with Tesco citing concern over bird flu and pork products as a drag on performance.

The supermarket giant rounded off its brief statement this morning by saying that “the intended partnership … is consistent with Tesco’s stated strategy of focusing on profitable routes to growth in fast-growing but less mature markets, with a disciplined approach to the allocation of capital. The transaction is subject to further due diligence and agreement of final terms.  There is no certainty that a transaction will occur.”

Shares in Tesco greeted the news with a gentle rise of 1% to 373p, and they are now up by around 10% year to date.

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> Stuart does not own any share mentioned in this article. The Motley Fool owns shares in Tesco.