Tesco Picks MBK as Preferred Bidder in Up to $7 Billion South Korea Deal -- 2nd Update

By Rick Carew in Hong Kong and Saabira Chaudhuri in London 

Retailer Tesco PLC has picked Asian private-equity firm MBK Partners LP as the preferred bidder to buy its South Korea retail operations--its largest outside the U.K.--in a deal that could be worth between $6 billion and $7 billion, according to people familiar with the situation.

A sale by Tesco, if completed, would jettison a big chunk of Tesco's global operations after a series of blunders at the U.K. retail chain including an accounting scandal, massive write-downs, and upheaval in its management ranks. Tesco is counting on the proceeds from the sale, which could include a dividend being paid out from the South Korean business, to help fund its turnaround effort.

The deal would be among the largest transactions in Asia this year and the largest private equity deal ever in South Korea, topping Hahn & Co.'s $3.6 billion purchase of control of Halla Visteon Climate Control Corp. from U.S. auto parts supplier Visteon Corp. in December, according to Dealogic data. MBK Partners, which manages about $8.2 billion in assets, was founded in 2005 by a group of former Carlyle Group LP executives.

Private equity deal makers are drawn to South Korea by the size of deals and the availability of cheap financing from local banks. However, they have had an uneven relationship with the country, where strong unions and government hostility have often made turning successful deals into profitable exits difficult. The poster child for difficulties in South Korea has been a long-running dispute between Dallas-based Lone Star Funds and the South Korean government. It has been in arbitration this year.

At the same time, the buyout of South Korea's Oriental Brewery by KKR & Co. and Affinity Equity Partners in 2009 for $1.8 billion is among the most profitable deals in Asia ever by private-equity funds. KKR and Affinity sold Oriental Brewery back to Anheuser-Busch InBev NV for $5.8 billion last year.

MBK has been competing for the Tesco business in South Korea, known as Homeplus, with a joint bid from KKR & Co. and Affinity Equity Partners, according to people familiar with the situation. MBK had initially teamed up with Goldman Sachs Group Inc. in its bid, but Goldman later withdrew from the bidding consortium, according to one person familiar with the situation.

The deal, if completed, would mark an about-face for the battered supermarket chain, which under former Chief Executive Terry Leahy embarked on an aggressive expansion plan, pushing from five countries into 13. Tesco's South Korea arm is the second-biggest outside the U.K., with more than 900 fully-owned and franchise stores that serve about six million customers a week.

A deal to sell the Homeplus chain would give Chief Executive Dave Lewis more ammunition to turn around performance at home where Tesco has lost ground to German discounters Aldi and Lidl, which are expanding across the U.K. at a steady clip. Mr. Lewis has cut prices, closed unprofitable stores, reduced Tesco's product lineup and put more staff on the shop floor in a bid to stem the slide in market share.

Tesco in April reported a pretax loss of GBP6.38 billion for the year as it logged a massive property write down, and the company also reported net debt of GBP8.5 billion. In addition to Homeplus, Tesco has yet to close a deal to sell its data-analysis unit, Dunnhumby. The company in January hired Goldman Sachs to weigh a sale of the business.

Write to Rick Carew at [e-mail]

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September 02, 2015 05:00 ET (09:00 GMT)

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