Tesco close to deal to merge ops in China - UPDATE

9th Aug 2013 12:29

After nine years of going it alone in China, Tesco is close to striking a joint venture deal with a local hypermarket chain.The British supermarket giant said it was in exclusive talks with China Resources Enterprises about merging its Chinese business with that of CRE's retailer Vanguard. A tie-up would create a business with £10bn of sales and bring together Tesco's 131 stores with Vanguard's 2986 outlets across China and Hong Kong. The joint venture would be 80% owned by CRE and 20% owned by Tesco.Analysts said the deal would allow Tesco to remain exposed to the growing Chinese market but without spending as much to do so. James Grzinic, analyst at Jefferies, estimates Tesco has invested £2bn of capex into Chinese shops and malls. He said: "If confirmed, Tesco would exchange full ownership in a sub-scale heavily loss-making operation with an investment into a profitable vehicle."This more cautious approach to China comes after a difficult time for Tesco's international operations. It pulled out of Japan last year and announced earlier this year it was to quit the US. Its Korean business has been hit by the introduction of restrictions on opening hours and European operations have been hampered by difficult market conditions. Trading profits in Asia and Europe were down by more than a fifth in its last financial year.Analysts estimate its Chinese business lost £100m in 2012/2013 and underlying sales were down 4.9% in the first quarter.Ishaq Siddiqi, Market Strategist at ETX Capital, said: "[Through this JV] Tesco keeps business alive in China but the stake is small enough for the UK supermarket to exit the country if things hit the fan just like it did with the US operations."The deal with CRE is still subject to further diligence and agreement of final terms.Tesco said: "There is no certainty that a transaction will occur. We will update the market with further details as and when appropriate."CRE is a Hong Kong listed company with the majority of its shares held by state-owned China Resources Holdings. Shares in Tesco were up 0.73% at 371.79p at 12:06 on Friday.TB