Tesco Agrees $1.08 Billion Real Estate Swap With British Land --Update

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 [e-mail]

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