Tesco Plc, the largest grocery store chain operator in the United Kingdom agreed to sell its South Korean business unit for $6.1 billion to a group of investors led by MBK Partners.
Under the terms of terms of the transaction, Tesco will receive £4.004 billion in cash or $6.1 billion. Its net cash proceeds from the sale will be approximately £3.351 billion after adjustment for estimated tax and other transaction costs.
Tesco strategic priority
In a statement, Tesco CEO Dave Lewis said the proposed sale of Homeplus allows the company to move forward with its “strategic priority of protecting and strengthening its balance sheet.”
Last year, Tesco announced that its immediate strategic priorities included regaining the competitiveness of its businesses in the UK, protecting and strengthening its balance sheet, and rebuilding trust and transparency.
The board of directors of Tesco believed that the sale offers significant value to shareholders.
Additionally Lewis said, “I would like to thank all of our Homeplus colleagues for their dedication, professionalism and service to our customers, which resulted in the creation of a great business. I am confident that the agreement we have reached with MBK Partners presents an exciting opportunity for their continued success.”
The British grocery chain operator decided to sell Homeplus as part its initiative to withdraw its operations in foreign markets. Tesco already exited its businesses in Japan and the United States and reduced its exposure in China.
Tesco said the sale would reduce its debt by £4.225 billion
Lewis aims to reduce Tesco’s debt and to remove its junk credit rating. Tesco’s profits have been negatively impacted by strong competition and lost market share to discounters including Aldi and Lidl.
Tesco has a total debt of £21.7 billion as of February 28, 2015. According to the company, the sale would reduce its debt by £4.225 billion.
The company plans to reduce the proceeds from the sale to redeem the upcoming bond and commercial paper maturities over the next 18 months. Tesco is also considering a selective purchase of some of its UK leasehold stores.
Bruno Monteyne, an analyst at Bernstein, told Reuters that the sale would alleviate concerns that Tesco will need to ask cash from shareholders to secure its balance sheet. He added that the deal would have little impact on the company’s net debt to core earnings ratio (from 6.2x to 6.0x) for the fiscal year 2015 to 2016.
Furthermore, Monteyne said the deal would allow Tesco to move below the 4.5x ratio needed by Moody’s for an investment grade credit rating in 2017 to 2018.