Tesco Breakup Would Offer Some Recovery for Buffett: Real M&A
2014-10-14 04:01:00.2 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Andrew Roberts
Oct. 14 (Bloomberg) -- Warren Buffett may find that he
still has a chance to recover some of his Tesco Plc investment.
Shares of the U.K. grocer have tumbled this year, reaching
an 11-year-low and spurring the 84-year-old billionaire to call
his eight-year stake a “huge mistake” this month. While
Buffett may not salvage all of his investment in the $24 billion
company, Sanford C. Bernstein & Co. says Tesco could increase
its value by more than 50 percent by shedding some of its
assets.
Getting to that level depends on both the company selling
units and new Chief Executive Officer Dave Lewis restoring price
competitiveness and improving the quality of food offered,
according to Bernstein and Exane BNP Paribas. The potential for
gains was evident last week, when the shares rallied 7.6 percent
on speculation Tesco may divest the Dunnhumby data-analytics
business.
“The current valuation is very much under where it should
be,” said Carl Short, equity analyst at S&P Capital IQ, who
recommends buying the stock. “It’s difficult to see a business
as big as Tesco in terms of its market share in the U.K. not
being turned round at some point.”
Tom Hoskin, a representative for the Cheshunt, England-
based company, declined to comment. Buffett didn’t respond to a
request for comment sent to an assistant.
Tesco gets about two-thirds of revenue and profit from the
U.K. Most of the rest comes from South Korea, Thailand and
European countries including Ireland and Poland. The company’s
market value is about 15 billion pounds ($24 billion), or 7.8
times earnings before one-time items.
Carrefour Playbook
By spinning off or selling businesses including U.K.
garden-center chain Dobbies and South Korean grocer Homeplus,
Tesco could generate 5 billion pounds to 7 billion pounds of
cash over the next two years, Cantor Fitzgerald LP analyst Mike
Dennis estimates. Buyout firm TPG Capital Management LP is
considering a 2 billion-pound purchase of Dunnhumby, Sky News
reported last week, without citing anyone.
“This simplification of the group and refocus of the core
U.K. grocery formats should support any new strategy that starts
to rebuild trust with U.K. customers, suppliers and investors,”
Dennis said.
Such a strategy was employed by Carrefour SA CEO Georges
Plassat, who sold operations with revenue of more than 5 billion
euros after taking the helm in 2012. The French retailer’s
investors, which include billionaire Bernard Arnault, have been
rewarded with a 57 percent gain in the share price since he took
over.
Reviving Tesco’s fortunes won’t be easy though. The grocer
has cut its profit outlook three times in two months after
losing U.K. market share, mostly to discounters Aldi and Lidl.
Since September, Lewis has had to suspend executives and
investigate an overstated earnings forecast.
Asset Disposals?
Tesco’s share price “assumes Dave Lewis cannot turn around
the U.K. and will do worse than Carrefour in its worst year,”
Bernstein analyst Bruno Monteyne wrote in a note. He has a
share-price estimate of 235 pence, about halfway between the
current stock value and his sum-of-the-parts valuation of 285
pence.
Asset disposals in Asia look most likely, according to
Exane analyst John Kershaw. E-Mart Co., Aeon Co. and Dairy Farm
International Holdings Ltd. could buy parts of the U.K. grocer’s
businesses there, the analyst said. Tesco may also sell stakes
in its banking business and Dunnhumby, he said.
The South Korean, Thai and Malaysian units could be valued
at about 9 billion pounds, according to Monteyne of Bernstein.
He values Tesco Bank at about 1.4 billion pounds and says the
unit may be a target for a bank that is strong in checking
accounts and mortgages such as TSB Banking Group Plc.
Other Businesses
Selling profitable Asian assets isn’t “in the long-term
interests of the business,” said David Gray, an analyst at
researcher Planet Retail in London. Instead, the grocer is
likely to focus on exiting non-core businesses such as the
Blinkbox movie-download service and Dobbies, he said. Tesco may
close Blinkbox if a buyer isn’t found, the London-based Times
reported last month.
Tesco could also generate additional revenue from its
hypermarkets by leasing some floor space to retailers such as
home-furnishing specialist Dunelm Group Plc, according to
Cantor’s Dennis.
Ashley Wager
Some investors are already betting on a recovery.
Billionaire Mike Ashley’s Sports Direct International Plc last
month placed a 43 million-pound wager on a turnaround by
entering an option agreement over 23 million shares.
And last week, HSBC Securities analyst Dave McCarthy raised
his recommendation on Tesco to neutral.
“We retain our concerns on the industry, the company’s
accounting and long-run profitability, but believe that the
underlying risk profile has improved,” McCarthy wrote.
Yet for any share revival, much will depend on Lewis’s
ability to stem a continuing loss of customers.
“Tesco is an oil tanker falling from the sky,” Monteyne
of Bernstein wrote. “Can Dave Lewis catch it? Rarely does so
much depend on the actions of one man.”
For Related News and Information:
Tesco Strengthens Outside Oversight With Board Appointments
NSN ND0K946S972S <GO>
Billionaire Buffett Says Tesco Investment Was ‘A Huge Mistake’
NSN NCTLW56JTSEN <GO>
Tesco’s M&A news: TSCO LN <Equity> TCNI MNA <GO>
Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
--With assistance from Noah Buhayar in New York.
To contact the reporter on this story:
Andrew Roberts in Paris at +33-1-5365-5015 or
aroberts36@bloomberg.net
To contact the editors responsible for this story:
Celeste Perri at +31-20-589-8505 or
cperri@bloomberg.net
Paul Jarvis, Thomas Mulier
2014-10-14 04:01:00.2 GMT
(For a Real M&A column news alert: SALT REALMNA <GO>.)
By Andrew Roberts
Oct. 14 (Bloomberg) -- Warren Buffett may find that he
still has a chance to recover some of his Tesco Plc investment.
Shares of the U.K. grocer have tumbled this year, reaching
an 11-year-low and spurring the 84-year-old billionaire to call
his eight-year stake a “huge mistake” this month. While
Buffett may not salvage all of his investment in the $24 billion
company, Sanford C. Bernstein & Co. says Tesco could increase
its value by more than 50 percent by shedding some of its
assets.
Getting to that level depends on both the company selling
units and new Chief Executive Officer Dave Lewis restoring price
competitiveness and improving the quality of food offered,
according to Bernstein and Exane BNP Paribas. The potential for
gains was evident last week, when the shares rallied 7.6 percent
on speculation Tesco may divest the Dunnhumby data-analytics
business.
“The current valuation is very much under where it should
be,” said Carl Short, equity analyst at S&P Capital IQ, who
recommends buying the stock. “It’s difficult to see a business
as big as Tesco in terms of its market share in the U.K. not
being turned round at some point.”
Tom Hoskin, a representative for the Cheshunt, England-
based company, declined to comment. Buffett didn’t respond to a
request for comment sent to an assistant.
Tesco gets about two-thirds of revenue and profit from the
U.K. Most of the rest comes from South Korea, Thailand and
European countries including Ireland and Poland. The company’s
market value is about 15 billion pounds ($24 billion), or 7.8
times earnings before one-time items.
Carrefour Playbook
By spinning off or selling businesses including U.K.
garden-center chain Dobbies and South Korean grocer Homeplus,
Tesco could generate 5 billion pounds to 7 billion pounds of
cash over the next two years, Cantor Fitzgerald LP analyst Mike
Dennis estimates. Buyout firm TPG Capital Management LP is
considering a 2 billion-pound purchase of Dunnhumby, Sky News
reported last week, without citing anyone.
“This simplification of the group and refocus of the core
U.K. grocery formats should support any new strategy that starts
to rebuild trust with U.K. customers, suppliers and investors,”
Dennis said.
Such a strategy was employed by Carrefour SA CEO Georges
Plassat, who sold operations with revenue of more than 5 billion
euros after taking the helm in 2012. The French retailer’s
investors, which include billionaire Bernard Arnault, have been
rewarded with a 57 percent gain in the share price since he took
over.
Reviving Tesco’s fortunes won’t be easy though. The grocer
has cut its profit outlook three times in two months after
losing U.K. market share, mostly to discounters Aldi and Lidl.
Since September, Lewis has had to suspend executives and
investigate an overstated earnings forecast.
Asset Disposals?
Tesco’s share price “assumes Dave Lewis cannot turn around
the U.K. and will do worse than Carrefour in its worst year,”
Bernstein analyst Bruno Monteyne wrote in a note. He has a
share-price estimate of 235 pence, about halfway between the
current stock value and his sum-of-the-parts valuation of 285
pence.
Asset disposals in Asia look most likely, according to
Exane analyst John Kershaw. E-Mart Co., Aeon Co. and Dairy Farm
International Holdings Ltd. could buy parts of the U.K. grocer’s
businesses there, the analyst said. Tesco may also sell stakes
in its banking business and Dunnhumby, he said.
The South Korean, Thai and Malaysian units could be valued
at about 9 billion pounds, according to Monteyne of Bernstein.
He values Tesco Bank at about 1.4 billion pounds and says the
unit may be a target for a bank that is strong in checking
accounts and mortgages such as TSB Banking Group Plc.
Other Businesses
Selling profitable Asian assets isn’t “in the long-term
interests of the business,” said David Gray, an analyst at
researcher Planet Retail in London. Instead, the grocer is
likely to focus on exiting non-core businesses such as the
Blinkbox movie-download service and Dobbies, he said. Tesco may
close Blinkbox if a buyer isn’t found, the London-based Times
reported last month.
Tesco could also generate additional revenue from its
hypermarkets by leasing some floor space to retailers such as
home-furnishing specialist Dunelm Group Plc, according to
Cantor’s Dennis.
Ashley Wager
Some investors are already betting on a recovery.
Billionaire Mike Ashley’s Sports Direct International Plc last
month placed a 43 million-pound wager on a turnaround by
entering an option agreement over 23 million shares.
And last week, HSBC Securities analyst Dave McCarthy raised
his recommendation on Tesco to neutral.
“We retain our concerns on the industry, the company’s
accounting and long-run profitability, but believe that the
underlying risk profile has improved,” McCarthy wrote.
Yet for any share revival, much will depend on Lewis’s
ability to stem a continuing loss of customers.
“Tesco is an oil tanker falling from the sky,” Monteyne
of Bernstein wrote. “Can Dave Lewis catch it? Rarely does so
much depend on the actions of one man.”
For Related News and Information:
Tesco Strengthens Outside Oversight With Board Appointments
NSN ND0K946S972S <GO>
Billionaire Buffett Says Tesco Investment Was ‘A Huge Mistake’
NSN NCTLW56JTSEN <GO>
Tesco’s M&A news: TSCO LN <Equity> TCNI MNA <GO>
Real M&A columns: NI REALMNA <GO>
Top deal stories: DTOP <GO>
--With assistance from Noah Buhayar in New York.
To contact the reporter on this story:
Andrew Roberts in Paris at +33-1-5365-5015 or
aroberts36@bloomberg.net
To contact the editors responsible for this story:
Celeste Perri at +31-20-589-8505 or
cperri@bloomberg.net
Paul Jarvis, Thomas Mulier