Tesco disposed off South Korean unit to pay its debts

An agreement was made between Dave Lewis, new chief of Tesco Plc and a group led by private-equity firm MBK Partners Ltd.  Tesco Plc to sell Tesco's South Korean business for £4 billion ($6.1 billion), the grocer's first significant removal as it find ways to ease the pressure and lessen its debts.

The purchase will shrink borrowings by £4.23 billion, according to Tesco.  The group comprises the Canada Pension Plan Investment Board, Public Sector Pension Investment Board, and Temasek Holdings Pte.

The sale constitutes an important event for Tesco Chief Executive Officer Dave Lewis in his effort to regenerate the faltering retailer.  As Cheshunt exits its biggest worldwide business, Tesco takes the key step in reducing a debt pile of about £21.7 billion that led its credit ratings being cut to a junk.  More divestments could follow, with Tesco also discovering the sale of its Dunnhumby data-analytics business.

Also, by selling Homeplus, Tesco CEO Lewis will have more dedicated time focusing on the company's fortunes at home.  Though it stays as the UK's market leader, the company's sales are declining during the price war fueled by the expansion of German Aldi and Lidl.

"Completing this disposal is very positive for Tesco's balance sheet," David Payne, an analyst at Nomura Holdings Inc., said by phone. "Investors have been getting more nervous about a possible rights issue at Tesco."

Tesco will record a loss of £150 million from the purchase.  About £3.35 billion will be extracted from the net cash proceeds for the taxes and fees associated with the deal and will be paid both in U.S. dollars and Korean won.  The sale values the unit's equity at about $4.9 billion, said MBK.

Cantor Fitzgerald analyst Mike Dennis called the sale "dilutive and disappointing."

"They are selling the family silver," said Bryan Roberts, an analyst at Kantar Retail. "It's their biggest, most profitable and most successful international business."

Tesco entered the Korean market way back in 1999 under the previous CEO Terry Leahy with a £130-million investment in partnership with Samsung.  The England-based grocer primarily held an 81% take before buying Samsung out of the venture in stages.  Tesco said it expects to complete the sale in Q4 and that it maintains "strong" businesses is Southeast Asia with good prospects for long-term growth.

HSBC Holdings Plc and Barclays Plc will serve as advisors for Tesco on the sale while Citigroup Inc. and Deutsche Bank AG will be the one to advise MBK.

Tesco is an England-based online retailer and delivery business that was founded in 1919 and has grown to be one of the biggest retailers in the world.  It opened its first store in the U.S. named Fresh & Easy.