U.K. Retailer Tesco PLC Considers Up to $7 Billion Sale of South Korea Operations -- Update

By P.R. Venkat in Singapore and Rick Carew in Hong Kong 

Retailer Tesco PLC is considering a sale of its South Korea retail operations--its largest outside the U.K.--potentially raising up to $7 billion dollars to fund its turnaround efforts, according to people familiar with the situation.

Tesco has hired HSBC Holdings PLC to manage a process to sell the retail operation, which is expected to receive interest from private-equity firms, these people said. A sale 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.

It could be a considerable deal for private-equity firms in Asia, as South Korea's banks have shown a willingness in the past to write big checks to finance acquisitions of strong cash-flow-generating businesses like retailers.

Bankers and investors have kept a close watch on Tesco's Asia operations, which are substantial in markets including South Korea, Thailand, and to a lesser extent Malaysia. Tesco vies with Carrefour SA of France for the position of world's second-largest retailer by revenue behind Wal-Mart Stores Inc.

Tesco's financial woes have put it in a situation where it has few good options. It posted a pretax loss of GBP6.38 billion ($9.52 billion) for the year ended Feb. 28, compared with a year-earlier profit of GBP2.26 billion. Its still-leading market share in the U.K. has steadily eroded in the face of competition from both higher-end grocery stores and aggressive discounters.

Those problems at home have spurred its new chief executive Dave Lewis to look elsewhere for cash to fund a turnaround. The new management team must wrestle with the potential sale of the Asia operations, which could provide cash, but also would take a bite out of the company's overall revenue.

At the same time, South Korea has been a tough market for many retailers, foreign or otherwise, to crack.

South Korean brick-and-mortar retailers have suffered as more shoppers hunt for bargains online. The country's Internet and mobile penetration rates are among the world's highest, and new competition from the likes of mobile commerce companies such as Coupong, which received a $1 billion investment from Japan's SoftBank Corp. this week, are putting pressure on retailers with higher fixed costs.

Korean buyers are also making purchases from overseas online shopping sites where they can avoid the steep markup on imported goods at local retailers. Sometimes similar goods can be purchased for as little as half the retail price, including shipping.

Foreign retailers, however, have had an especially tough time in a market dominated by local players. Both Wal-Mart and Carrefour have long since exited the South Korea market, selling to local competitors in 2006. Wal-Mart sold its 16 outlets there for $872 million to Shinsegae Co. and E. Land Group purchased Carrefour's operations for $1.86 billion that same year.

Write to P.R. Venkat at [e-mail] and Rick Carew at [e-mail]

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