Will Tesco PLC’s £4.2bn Sale Be Enough To Secure Its Balance Sheet?

Struggling retail giant Tesco (LSE: TSCO) has been in negotiations to sell off parts of its international retail empire for almost a year now. Today, the company named a consortium led by South Korean private equity firm MBK Partners as the preferred bidder for its business in the country.

Tesco’s South Korean arm was considered to be one of the retail giant most attractive assets several years ago. However, a brutal price war within the South Korean retail market, along with the introduction of draconian government regulations designed to protect smaller stores have hit sales.  

It’s believed that MBK Partners is offering $6.4bn for Tesco’s Korean business, approximately £4.2bn at current exchange rates. What’s more, according to certain reports, Tesco is set to receive a $844m (£549m) dividend from its Korean business before the sale completes. 

Multiple sales

Tesco is in the process at least three parts of its global business, including the South Korean arm, data analysis business Dunnhumby, and Tesco Mobile. These sales are intended to relieve pressure on Tesco’s balance sheet. The group reported adjusted net debt of £8.5bn at the beginning of this year. 

And so far, things seem to be going to plan. If Tesco receives £4.8bn from the sale of its South Korean business, the group will be able to reduce net debt by more than 50%. Moreover, Tesco’s management believes that the sale of Dunnhumby could raise as much as £1bn although it’s believed bidders are preparing offers of about £700m or less. Still, an additional £700m will help reduce Tesco’s net debt further.

If everything goes to plan, in the best-case scenario Tesco’s adjusted net debt could fall by 65% to £3bn when both of these sales are complete. 

Waiting for an update

Tesco should be able to update the market further on the asset sales at some point during the next week or two. Final bids for the Asian business were due on Monday, and the final bids for Dunnhumby are due in a few weeks. 

Unfortunately, if everything doesn’t go to plan, and Tesco receives less from the sale of assets than initially expected, the group could be forced to conduct a rights issue.

According to credit ratings agency  Moody’s, Tesco needs to find £5bn to relieve the pressure on its overstretched balance sheet. Initial figures suggest that the sale of Tesco’s South Korean business, Dunnhumby and Tesco Mobile could raise enough to meet this target, although until the final bids are announced, it’s not possible to say for sure if this will be the case. 

But all in all, it’s clear that Tesco’s outlook is improving gradually. While the group’s sales may still be falling, Tesco has made real progress restructuring its operations and selling off non-core high-cost assets such as its troubled digital entertainment business Blinkbox, as well as its fleet of private jets. Additional asset sales will strengthen the company’s balance sheet further. 

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Rupert Hargreaves owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.