By Ed Ballard
LONDON--British supermarket behemoth Tesco PLC has moved to
wield more control over its stores, striking a GBP733 million
($1.08 billion) real estate swap with property-investment firm
British Land Co.
The U.K.'s largest retailer went on an expansion spree under
former Chief Executive Terry Leahy, pushing into Japan, Thailand
and Malaysia, as well as the U.S. and China. To fund that
expansion, Tesco sold a number of stores and then leased them back,
effectively increasing debt.
It has since made a sharp U-turn, sharpening the focus on its
core U.K. business, exiting its unprofitable U.S. venture, Fresh
& Easy, and moving its Chinese operations into a joint venture
with a local retailer. About 18 months ago, it halted its
sale-and-leaseback strategy.
Under new CEO Dave Lewis, Tesco has been working to simplify its
business: looking to sell noncore assets, streamline its product
offering and cut extra layers of management. In October, Mr. Lewis
noted that Tesco, which is the U.K.'s largest private-sector
employer, had a rent bill of roughly GBP1.4 billion a year, calling
it a "significant part" of the company's cash flow and indicating
that the company would take a hard look at its property
portfolio.
In its latest move, Tesco has bought British Land's stake in 21
stand-alone Tesco food stores. The investment firm's 50% stake is
valued at GBP352 million. In exchange, the commercial developer
bought Tesco's 50% stake in two portfolios that are made up of
shopping centers and retail parks anchored by Tesco outlets. That
stake is valued at GBP381 million. Tesco will get GBP96 million as
part of the deal.
Tesco's buyback of 21 stores is "a positive step in reducing the
company's significant deficit in space ownership relative to U.K.
peers, " said analysts at Jefferies.
Still, the swap hardly moves the needle for Tesco, which has
more than 7,300 stores and fully owns just 53% of them.
Jefferies characterized Friday's move as "a smallish step in the
right direction." The retailer owns the lowest proportion of its
stores compared with its publicly traded rivals, with Wm. Morrison
Supermarkets PLC owning about 85% of its stores and J Sainsbury PLC
owning 60%.
For British Land, the deal decreases the firm's exposure to food
stores and increases it to retail parks and shopping centers that
house an array of tenants. Stand-alone food stores now make up 8%
of its retail portfolio, down from 10% previously. As part of the
deal, British Land will take over Tesco's stake in three
stand-alone food stores that were previously held in a joint
venture between the two companies. The rent Tesco pays for these
will be determined by the market rate and won't be subject to
increases tied to the retail price index, a measure of
inflation.
Ed Ballard contributed to this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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