Tesco said on Wednesday it would buy 36 discount stores from South Korea’s E-Land for $1.9 billion (£976 million) in its biggest single acquisition.
Tesco, like global rivals Wal-Mart Stores and France’s Carrefour, is seeking to further expand in fast-growing international markets to offset slowing growth at home. South Korea is Tesco’s second most profitable market after Britain.
The deal allows Tesco’s South Korean discount store business, the second-largest in the country, to beef up in size and challenge the top-ranked E-Mart chain, run by Shinsegae. Shares of rival South Korean retailers dropped sharply in anticipation of the deal, which will intensify competition. “We’ve been pursuing this for two years, it is a terrific strategic opportunity for us to be equal number one in the market,” Andrew Higginson, Tesco Finance and Strategy Director, told Reuters in London. Higginson said this was the biggest acquisition yet undertaken by Tesco, but it did not necessarily mark a change in Tesco’s acquisition strategy. “There are very few deals of this size available. We are always in the market, in markets where we are successful, we are always looking for new stores,” he said.
Tesco dominates British retailing with some 2,000 stores and more than one-third of the grocery market share. The purchase price, which includes existing debt, equates to £958 million. The stores being acquired are all hypermarkets with a combination of food and non-food products. E-Land, which built its business as a fashion retailer, bought 32 outlets from France’s Carrefour in 2006 for $1.85 billion. Tesco shares dipped 0.7% in a flat London market FTSE. Shares in Shinsegae, which also operates department stores in South Korea, dropped 6.9% in a flat market. Another Korean rival, Lotte Shopping, lost 2.9%.
E-Land was selling the outlet business due to financial burdens and labor conflicts, analysts said. “E-Land’s discount store business started with aggressive marketing but its brand reputation was hurt by labor issues,” said Lee S.K., an analyst at Hyundai Securities. “Tesco has a strong brand, sourcing power and services, and will be able to strengthen the business following the M&A.” After the 2006 purchase, E-Land conducted a thorough remodeling of the former Carrefour stores, giving them a new brand name and seeking to distance itself from the warehouse-like image that was shunned by South Korean consumers. E-Land posted a 194 billion won loss from the discount store business last year, according to Hyundai’s Lee. Tesco’s South Korean discount store chain, Home Plus, has 66 outlets and trails E-Mart chain, which has 111 stores.
Last week the South Korean economy ministry said Tesco would invest $100 million in a logistics centre in central Korea, which is expected to open in December 2010. (Reuters)