Tesco asset sales in focus ahead of first quarter update

Tesco shares are having a great fortnight.

Despite a wobble at the beginning of last week, right now, the stock of what is still the UK’s largest supermarket in terms of market share was approaching a rise of 10% by Thursday’s close

And that, a day before perhaps the biggest scheduled news event on the UK corporate calendar this week.

Tesco Plc.’s first-quarter interim management statement will be released at 7am BST, on Friday 26th June.

But no one is expecting the supermarket group that in April reported almost the biggest loss in UK corporate history, to be anywhere near a turnaround.

Rather, its shares are drifting higher as it seems to be making progress on one of the few fronts it has at the moment for profitable returns: asset sales.

After much speculation that stretches back to at least October 2014, Tesco recently announced it was putting some of its most profitable assets up for sale.

Thursday brought news of first-round bids for its Homeplus unit in South Korea.

Goldman Sachs’s private equity is likely among the bidders, joining five other firms, reportedly including Affinity Equity Partners, Carlyle Group, CVC Capital Partners, KKR & Co and MBK Partners.

South Korea’s Hyundai Department Store was also considering whether to join the auction.

There is a complex arrangement in place to part-finance the deal, which sets a floor for the potential deal.

BNP Paribas and HSBC are slated to provide ‘stapled’ (pre-arranged) financing to bidders worth $3.6bn.

A Homeplus buyer is not obligated to take the financing. But the facility obviously means the operator of hypermarket and a home delivery shopping service can be sold for no less than the available funding

Given that the financing already represents a multiple of about 4.80 times, based on Homeplus’ 2014 Ebitda, below a rough international average multiple for disposals of 5x, a higher one for the total cost might be as much as 8x.

Especially as Homeplus was reportedly among the Top 5 retailers of its kind as recently as last year.

These not particularly scientific calculations combined with speculation point to a disposal price of about $6bn (about £3.82bn).

If achieved, the proceeds will go a long way towards helping to eliminate Tesco’s net debt that stood at £8.5bn at last count.

We can expect some sort of update from Tesco as regards Homeplus, tomorrow.

Dunnhumby another disposal maybe

But it’s not the only disposal activity the retailer has been involved in over the last few months.

Media reports on Wednesday suggested a former Tesco marketing manager was part of a team working with BC Partners on a bid for Dunnhumby Ltd., the operator of Tesco’s Clubcard customer loyalty business, which also runs similar schemes for other consumer-facing clients.

A US joint venture with retailing giant Kroger Inc., had been a sticking point, but the group is now in the process of acquiring the business’ US operations.

BCP joins a fray for what is perhaps Tesco’s second-most valuable asset slated for disposal, after those in Asia.

Others in the running reportedly include UK-based advertising giant WPP Plc., in partnership for a bid with private equity group General Atlantic, and even Google Capital in cahoots with Permira.

The name of another PE group, TPG, is also persistent in City talk and media reports.

Tesco has already sold its on-demand TV service BlinkBox Entertainment to TalkTalk for about £25m, and BlinkBox Music to a small streaming service for £5m.

All told, Tesco may have lost as much as £40m from the entire venture.

Sales may crater more

So much emphasis is being placed on Tesco’s asset sales of course because its retail performance remains tepid at best.

Analysts forecast a 2-3% drop in sales at British stores open over a year over the 13 weeks to 30th May, its first quarter.

That would be worse than the 1.2% decline in the fourth quarter of 2014/15, when the group recorded growth in UK like-for-like sales for the first time in over four years, albeit helped by price cuts.

Tough comparable earnings from Q1 2014 partly explain the expected sales fall.

However it would contrast somewhat with independent data on Tesco sales from winter 2014 to spring 2015.

• 12 weeks to 1st February 2015: 0.3% growth y/y
• 12 weeks to 29th March 2015: 0.3% growth y/y
• 12 weeks to 24th May 2015: -1.3% decline y/y

It’s also worth remembering that Tesco did manage to report trading profit of £1.4bn in 2014, twice as large as expected.

It’s therefore worth being prepared for at least a moderate surprise in Tesco’s earnings in the morning.

Tesco shares would rally if the like-for-like sales performance is even somewhat lighter than the 2%-3% fall widely expected.

However, its chart doesn’t look particularly promising.

The intersection of a falling and rising trend that’s taken the stock up to the 50-day moving average (lilac) would seem to require a higher order of momentum than the stock can muster at the moment to surpass.