UK's Tesco in $558M China supermarket tie-up

HONG KONG - British retail giant Tesco is paying a Chinese state-owned company $558 million to take over its supermarkets in China after failing to make headway on its own since entering the country a decade ago.

Tesco's 134 Chinese stores and its shopping mall business are being vacuumed up by China Resources Enterprises Ltd., which is the supermarket leader with nearly 3,000 stores across the country. In exchange, Tesco gets a 20 percent stake in a joint venture with China Resources that will operate the combined retailing businesses.

The China business of Tesco, Britain's biggest retailer by sales, suffered a pre-tax loss of 222 million pounds ($360 million) in its most recent financial year. The year before, it lost 125 million pounds.

"Through this deal we have a strong platform in one of the world's most exciting markets and it will move us more quickly to profitability in China," Tesco CEO Philip Clarke said yesterday.

Tesco's decision to stop operating independently is another misstep by a foreign company in China's fast growing retailing industry, where competition from local rivals and online shopping is fierce. A slowdown in the world's second biggest economy has added to the challenges. Economic growth slowed to a two-decade low of 7.5 percent in the latest quarter.

Tesco will pay China Resources 4.325 billion Hong Kong dollars ($558 million) for the 20 percent stake in the joint venture. It has an option for an additional 5 percent five years after the deal is done. Some HK$4 billion of the payment will go to China Resources as a special dividend, with the rest to be used as working capital.

The joint venture will operate supermarkets, hypermarkets, convenience stores, cash and carry businesses and liquor stores, as well as online versions of these businesses. It will be the leading retailer in seven of China's eight wealthiest and most populous provinces, Tesco said.

Tesco, which entered China in 2004, has stores in 11 provinces, most of them in the cities of Shanghai and Tianjin and the northeastern province of Liaoning.

The deal is expected to close in the first half of 2014, subject to regulatory and shareholder approval.

China Resources said the tie-up will combine "local customer insights and international retail best practice" and also drive the "internationalization" of China's retail industry.

China Resources is the market leader in the country's highly fragmented supermarket business, with 3 percent share of a grocery market worth 3.8 trillion yuan ($620 billion), according Euromonitor International.

Revenue at the combined business is expected to be nearly 10 billion pounds ($16 billion) a year.

Tesco is the latest of several European and US retailers to suffer a hard landing from dreams of easy riches in China.

Last year, US-based home improvement retailer Home Depot Inc., which entered China in 2006 by acquiring a local chain, closed its seven remaining big box outlets to focus on internet-based sales and specialty stores.

In 2011, US electronics retailer Best Buy stunned customers and employees when it closed all nine of its Best Buy-branded Chinese stores in order to focus on its Five Star outlets, which it acquired through the purchase of a provincial retailer.

The announcement comes as Tesco scales back an aggressive international expansion to refocus on its mainstay U.K. market. The company yesterday reported that interim net profit fell by about half to 820 million pounds,

"With profits nose-diving in Europe and Asia, the foreign markets that once provided a perfect hedge against weak demand at home are now more hurdle than help," said John Ibbotson, director of U.K. consultancy Retail Vision.

Earlier this year, Tesco beat a retreat from the US by selling off its unprofitable Fresh & Easy supermarket chain. The chain flopped mainly because Tesco opened it just before the start of the economic crisis and misjudged the shopping habits of its target customers. It also said it would leave Japan.