Tesco is planning to hand out £5bn to shareholders and pump £2.5bn into its pension fund after lining up the sale of its Thai and Malaysian businesses.
Thai conglomerate CP Group, which operates thousands of 7-Eleven stores in Thailand and the Siam Makro cash and carry chain, has agreed to buy Tesco Lotus in Thailand, which has a network of nearly 2,000 stores, and Tesco Malaysia, which has 68 stores, for $10.6bn (£8.2bn).
The deal is subject to local regulatory approval. Tesco shareholders must also approve the deal.
Tesco said the disposal would not only result in a return of “significant proceeds” to shareholders in the form of a special dividend but “realise a significantly higher value than could be generated from Tesco’s continued ownership and investment”.
Dave Lewis, the chief executive of Tesco, said: “This sale releases material value and allows us to further simplify and focus the business, as well as to return significant value to shareholders.”
The company said the planned £2.5bn contribution to its pension fund would also de-risk the business by reducing debt. It said the payment would eliminate the fund’s current deficit and “significantly reduce the prospect of having to make further pension deficit contributions in the future”.
The deal draws a close to Tesco’s ambitions in Asia following the sale of its stake in its Chinese joint-venture last month and Korean arm in 2015. Tesco also operated in Japan for eight years, pulling out in 2011.
Tesco made its first foray overseas in the 1980s when it acquired H Williams in Ireland – although it later sold the business – and went on to open thousands of stores outside the UK. After a disastrous foray into the US with Fresh & Easy, which was put into the US version of administration in 2013, Asia had been seen as the most likely source of future growth.
The company began the recent divestments of its Asian concerns after an accounting crisis in 2014 and a slowdown in its UK home market led to a string of profit warnings and the reduction of its credit status to junk. It said the sale of its Thai and Malaysian businesses came from a “strengthened position” of improved performance in the UK and the restoration of the dividend.
Tesco began operating in Thailand in 1998 through Ek Chai and operates through a variety of formats including shopping malls and an online service. The Malaysian venture started in 2002, as part of a joint-venture with Sime Darby Berhad, and also operates a shopping malls alongside its supermarkets.
Clive Black, an analyst at Shore Capital, said Tesco was losing a “key growth strand” with the disposal of its successful Thai and Malaysian business, which made a combined profit of £235m last year.
However, he added: “We like the idea of a capital-disciplined Tesco, focused upon driving out remaining self-improvement and growth opportunities.” He said he would not be surprised if Tesco was considering the sale of its Polish business next.
Bruno Monteyne, an analyst at Bernstein Research, said Tesco appeared to be planning to argue that the one-off pension top-up payment was an alternative to the annual £285m payments that the business is making into its pension fund. He said the cancellation of pension top-ups would help offset the loss of profits from Asia and increase the likelihood of Tesco launching share buybacks.
