Mike Dennis Comments: Tesco Woes Require More Asset Sales to Bolster Revival: Real M&A

January 9, 2015, Bloomberg News

Tesco Plc (TSCO) says there’s no need for a fire sale of its assets. The U.K.’s largest grocer still will have to put more of its pieces on the block to supplement the turnaround plan it unveiled yesterday.

The supermarket chain’s efforts include halting dividend payments, selling the Blinkbox video service and hiring advisers to explore a sale of the Dunnhumby analytics business. Chief Executive Officer David Lewis said there’s “no urgency” as far as additional divestitures are concerned. Analysts say more sales are inevitable if the company, valued at 17 billion pounds ($26 billion), wants to shore up its finances without having to raise money in the stock market.

Tesco’s earnings are taking a hit amid increased competition from discount chains and other rivals, and Fitch Ratings said its announced moves aren’t enough on their own to restore key credit metrics. Moody’s Investors Service cut the company’s credit rating to junk status.

“Bottom line, more is likely required to fix the balance sheet,” James Grzinic, a London-based analyst at Jefferies LLC, wrote in a report Thursday.

Selling Dunnhumby could yield as much as 2 billion pounds. The banking and Asian assets are likely next, said Sanford C. Bernstein & Co. Those operations have been valued at more than 10 billion pounds, combined. Tesco had about 14 billion pounds of debt outstanding as of August, according to data compiled by Bloomberg.

‘Very Secure’

Investors initially cheered Tesco’s revival plan, sending the shares up 15 percent. The turnaround actions, which also include store closures, spending cuts and a relocation of the grocer’s head office, will give it more capital to pay off obligations and reinvest in the struggling business.

Today, Tesco shares fell 2.5 percent to 204.05 pence at 1:30 p.m. in London.

“From a liquidity and funding point of view we’re in a very, very secure place,” CEO Lewis told reporters at a press conference in London. “There’s absolutely no way in the world or need at all for there to be a fire sale of Tesco assets.”

The divestiture plans laid out by Tesco are a positive, but they won’t be enough in the long term, Bruno Monteyne, a London-based analyst at Bernstein, said in a phone interview.

Monteyne valued the company’s South Korea, Thailand and Malaysia units at about 9 billion pounds in October. He put the price of Tesco Bank at about 1.4 billion pounds and said the division could be a target for a lender that’s strong in checking accounts and mortgages such as TSB Banking Group Plc. (TSB)

Tesco could also eventually sell off some of its shopping mall assets and the Dobbies U.K. garden chain, Mike Dennis of Cantor Fitzgerald said in a phone interview. The company’s willingness to take strategic action is a good sign, he said.

“It might take them several years to get back to a decent level of profitability but I think the market is saying there is a higher likelihood that it will happen,” Dennis said.