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As Tesco PLC Appoints A New Chairman, Are The Shares A Buy?

Tesco (LSE: TSCO) announced last night that it had appointed a new chairman, John Allan, who will replace current chairman Sir Richard Broadbent from 1 March.

Mr Allan’s appointment could be the most high-profile board appointment we see this year — but what should Tesco shareholders expect from their new chairman, who has a strong business track record, but has not worked in the supermarket sector since the 1980s?

Top choice?

Given that Tesco’s current chief executive, Dave Lewis, doesn’t have any retail experience, many investors expected Tesco to hire someone with significant food retail experience to chair the firm’s board.

According to recent press reports, there were two other serious contenders for the job: Sir Ian Cheshire, the former chief executive of B&Q owner Kingfisher, and Archie Norman, who delivered a strong turnaround as chief executive of Asda in the 1990s.

However, it’s understood that both men turned down the Tesco chairmanship, for various reasons, leaving Mr Allan as the only serious contender.

Turnaround credentials

Mr Allan’s supermarket experience is now rather dated — he was retail director in charge of marketing, buying and retail operations at former supermarket Fine Fare in the 1980s, when it was part of Associated British Foods.

However, more recently, Mr Allan has delivered a number of big deals and turnarounds that could bode well for Tesco shareholders: in the 1990s, he was chief executive of shipping and logistics firm Ocean Group, which merged with competitor NFC to form Exel, which was then sold to Deutsche Post.

In 2009, Mr Allan became chairman of Dixons Retail, overseeing a turnaround that saw the retailer’s shares five-bag from their 2011 low, before merging with Carphone Warehouse to form Dixons Carphone.

Big gains for Tesco shareholders?

I don’t see a lot of short-term upside for Tesco shareholders: in my view, a lot of optimism has already been priced into the supermarket’s shares since Mr Lewis took charge in 2014.

Indeed, based on the latest consensus forecasts, Tesco shares look quite expensive, trading on a 2016 forecast P/E of 22, and a prospective yield of 1.5%.

In the short term, I rate Tesco shares as no more than a hold — but in the medium to long term, I remain a buyer, and believe that Mr Allan’s appointment is likely to be positive for shareholders.

Could Tesco end up taking over a smaller competitor and solidifying its position as the UK's biggest supermarket? It's not impossible -- but investing in firms based on takeover hopes is highly risky.

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Roland Head owns shares in Tesco. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.