TESCO AGREES TO SELL HOMEPLUS

TESCO AGREES TO SELL HOMEPLUS

TESCO AGREES TO SELL HOMEPLUS
 Proposed sale of Homeplus to a group of investors led by MBK Partners and including Canada Pension Plan Investment Board, Public Sector Pension Investment Board and Temasek Holdings (Private) Limited (the “Disposal”), following competitive sale process
 Represents enterprise value of £4,240 million on cash and debt free basis
 Cash consideration of £4,004 million before tax and other transaction costs
 Significant reduction of £4,225 million in Tesco group’s total indebtedness from net cash proceeds and associated reduction in capitalised lease and other commitments
 Completion is expected in calendar Q4 2015, conditional on Tesco shareholder approval and regulatory approvals in the Republic of Korea
Dave Lewis, Chief Executive of Tesco, said:
“After a highly competitive process, we are announcing today the proposed sale of Homeplus, our business in the Republic of Korea. This sale realises material value for shareholders and allows us to make significant progress on our strategic priority of protecting and strengthening our balance sheet.
I would like to thank all of our Homeplus colleagues for their dedication, professionalism and service to our customers, which has resulted in the creation of a great business. I am confident that the agreement we have reached with MBK Partners presents an exciting opportunity for their continued success.”
HSBC Bank plc is acting as Lead Financial Adviser and Barclays Bank PLC, acting through its Investment Bank (“Barclays”), as Financial Adviser and Sponsor to Tesco in relation to the Disposal.
This summary should be read in conjunction with the full text of this announcement. This announcement is available at http://www.tescoplc.com. A circular containing details of the Disposal and a notice convening a general meeting of the Company will be sent to Tesco shareholders as soon as is practicable.
Enquiries:
Tesco
Investor Relations Media
Chris Griffith Tom Hoskin
+44 (0)1992 644 800 +44 (0)1992 644 645
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HSBC Bank plc (Lead Financial Adviser) Charles Packshaw +44 (0)207 991 8888 Rajeev Sahney +852 2841 8405
Barclays (Financial Adviser and Sponsor) Alisdair Gayne +44 (0)207 623 2323 Mark Todd +44 (0)207 623 2323
TESCO PLC (“TESCO” OR THE “COMPANY”) PROPOSED DISPOSAL OF HOMEPLUS
1. Introduction
Tesco announces that it has entered into a conditional agreement with entities established by a group of investors led by MBK Partners and including Canada Pension Plan Investment Board, Public Sector Pension Investment Board and Temasek Holdings (Private) Limited (the “Purchasers”) with respect to the sale of its retail business in the Republic of Korea (the “Disposal”), which is comprised of Homeplus Co., Ltd (“Homeplus”), Homeplus Tesco Co., Ltd and their respective subsidiaries (together, the “Homeplus Group”). The Disposal realises material value for Tesco shareholders and allows the Tesco group to make significant progress in its strategic priority of protecting and strengthening the group’s balance sheet.
The consideration payable to Tesco pursuant to the Disposal represents an enterprise value of £4,240 million on a cash and debt free basis.
Under the terms of the Disposal, Tesco will receive £4,004 million in cash. After adjustment for estimated tax and other transaction costs, the net cash proceeds from the Disposal will be approximately £3,351 million (the “Net Cash Proceeds”).
The Disposal constitutes a Class 1 transaction for Tesco under the UK Listing Rules and completion is therefore conditional on, inter alia, the approval of Tesco shareholders at a general meeting of the Company. A circular containing further details of the Disposal and a notice convening the general meeting will be sent to Tesco shareholders as soon as practicable.
2. Background to and reasons for the Disposal
On 23 October 2014, Tesco announced that its immediate strategic priorities were:
 To regain competitiveness in its UK business
 To protect and strengthen its balance sheet
 To rebuild trust and transparency in the business and brand
Consistent with these priorities, senior management initiated a strategic review of all aspects of the Tesco group with the aim of improving its competitive position, reducing its total level of indebtedness and delivering sustainable returns. During this review, a considerable level of unsolicited interest was received from several parties in relation to the Homeplus business. The Board subsequently decided to launch a competitive sale process for the Homeplus Group.
The Directors believe that the Disposal delivers material value and certainty for shareholders and will deliver the following important benefits to shareholders:
 Enable Tesco to realise value, at an appropriate time, from its investment in the Homeplus Group over the past sixteen years
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 Net Cash Proceeds together with the associated reduction in capitalised leases and other commitments, will enable Tesco to protect and strengthen its balance sheet by reducing total indebtedness by £4,225 million
 Allow Tesco to make significant progress on its strategic priority of protecting and strengthening its balance sheet
Following the Disposal, Tesco retains strong businesses in South East Asia with good prospects for long term growth, together with its businesses in the UK, Republic of Ireland and Europe.
3. Information on the Homeplus Group
The Homeplus Group started in 1999 as a hypermarket only business and today operates as a multichannel retailer. The Homeplus Group operates online and through 1,075 outlets, of which 140 are hypermarkets, 609 are supermarkets and 326 are convenience stores (the supermarkets and convenience stores being a mixture of directly owned and franchised). It also operates 139 shopping malls adjacent to its hypermarkets, with over 6,500 tenant leases.
The Homeplus Group is a leading grocery retailer in the Korean market and one of the most recognised retail brands in the Republic of Korea. It generated approximately KRW9.3 trillion (£5.4 billion) in sales in the financial year ended 28 February 2015, serves over six million shoppers each week and employs over 26,000 people.
The following summary of the trading results of the Homeplus Group for the three years ended 28 February 2015 has been extracted without material adjustments from the consolidation schedules used in preparing Tesco’s audited consolidated financial statements for the years ended 23 February 2013, 22 February 2014 and 28 February 2015.
52 weeks ended 23 February 2013
£ million
EBITDA before one off items
Trading profit
Operating profit before one off items Operating profit / (loss)
Profit / (loss) before taxation
Total operated selling area (sq footage)
Revenue 5,291
The Homeplus Group has demonstrated robust performance in a challenging regulatory environment over the past few years. The introduction of the Distribution Industry Development Act (DIDA) has had a material adverse impact on store opening hours and trading days at Homeplus with an associated impact on revenue and profitability. The result has been a reduction in like-for-like sales over the past three years, with overall revenue being stabilised through growth in store numbers and online.
For the 53 weeks ended 28 February 2015, there was a significant reduction in profitability of the Homeplus Group. This was principally driven by £332 million of one-off charges included within operating profit, with the most significant items being a £216 million property impairment charge and £70 million for the write down of inventories and £46 million of other items. In addition, operating
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52 weeks ended 22 February 2014
£ million
5,448 674 729 376 368 513 555 505 507 438 459 13,044 13,583
53 weeks ended 28 February 2015
£ million
5,359 466 292 281 (96) (131) 13,447
profit in the years ended 23 February 2013 and 22 February 2014 benefitted from gains on sale and leaseback transactions of £166 million and £204 million respectively.
In June 2015, incidents of Middle East Respiratory Syndrome (MERS) were first notified in the Republic of Korea. This had an adverse impact on sales and footfall in Q2 2015 but has since stabilised.
4. Summary of terms of the Disposal
The consideration payable to Tesco pursuant to the Disposal represents an enterprise value of £4,240 million on a cash and debt free basis.
Under the terms of the Disposal, Tesco will receive £4,004 million in cash for the Homeplus Group, which includes the repayment of £798 million of intercompany debt. The Net Cash Proceeds from the Disposal will be approximately £3,351 million after deductions for estimated tax and other transaction costs of £653 million and will be received in a combination of US dollars and Korean won.
Completion of the Disposal is subject to the satisfaction of certain conditions precedent, including Tesco shareholder approval, regulatory approvals in the Republic of Korea and, in limited circumstances, there being no breach of warranties given by Tesco which could reasonably be expected to result in a significant material adverse effect on the Homeplus Group business.
The Disposal includes certain transitional services to be provided by each of the parties for a limited time period following completion.
Tesco has received assurances from the Purchasers that they will maintain the existing employment terms of the Homeplus employees and the Purchasers have provided further assurances that there will be no compulsory redundancies of the Homeplus workforce after completion of the Disposal. Tesco has agreed to make a contribution to the cost of any amounts paid to the Homeplus Group employees in relation to the Proposed Transaction.
5. Use of proceeds and financial effects of the Disposal
The Net Cash Proceeds arising from the Disposal are expected to be £3,351 million which will result in a material improvement in balance sheet strength. The illustrative pro forma impact on Tesco’s total indebtedness as at 28 February 2015, as if the Disposal had occurred on 28 February 2015, is a reduction of £4.2 billion from £21.7 billion to £17.5 billion.
In the financial year ending 28 February 2015, the Homeplus Group contributed EBITDA of £466 million and trading profit of £292 million to Tesco. It is expected that the Disposal will have a dilutive effect on the earnings per Tesco share in the current financial year ending 28 February 20161 and will result in an estimated accounting loss after tax of circa £150 million.
It is Tesco’s intention to use the Net Cash Proceeds from the Disposal to support its strategic priority of protecting and strengthening the balance sheet. The proceeds will be used primarily to redeem certain upcoming bond and commercial paper maturities over the course of the next 18 months. The increased financial flexibility will also enable Tesco to consider value accretive opportunities across the group including the selective purchase of some existing leasehold stores in the UK.
As at 28 February 2015, the Homeplus Group had gross assets of £4.8 billion and net assets of £2.8 billion.
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This statement is not intended to be, and should not be construed as, a profit forecast and should not be interpreted to mean that earnings per Tesco share for the current or future financial years will necessarily match, or be greater or less than, the historical earnings per Tesco share.
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6. Expected timetable to completion
A circular containing further details of the Disposal, the Board’s recommendation, and the notice of the general meeting and the resolution required to approve the Disposal will be sent to Tesco’s shareholders as soon as practicable. Completion of the Disposal is expected to occur during the fourth quarter of calendar 2015.
7. Advisers
HSBC Bank plc is acting as Lead Financial Adviser and Barclays Bank PLC, acting through its Investment Bank (“Barclays”), as Financial Adviser and Sponsor to Tesco in relation to the Disposal.
Enquiries:
Tesco
Investor Relations Chris Griffith +44 (0)1992 644 800 Media Tom Hoskin +44 (0)1992 644 645
HSBC Bank plc (Lead Financial Adviser) Charles Packshaw +44 (0)207 991 8888 Rajeev Sahney +852 2841 8405
Barclays (Financial Adviser and Sponsor) Alisdair Gayne +44 (0)207 623 2323 Mark Todd +44 (0)207 623 2323
Notes to editors
Tesco is a team of over 500,000 colleagues, serving customers in 7,800 shops in 12 countries around the world, generating annual sales of £69.7bn in the UK, Ireland, Central Europe and Asia. Tesco plc is listed on the London Stock Exchange. More information can be found at www.tescoplc.com
Established in March 2005, MBK Partners is the largest private equity firm in Korea and one of the largest private equity groups in the Asia-Pacific region, with over US$8.2 billion in capital under management. MBK Partners focuses on buyouts in Korea, Japan and China and, in Korea, is registered with the Financial Supervisory Commission as a domestic private equity firm in Korea. With offices in Seoul, Tokyo, Shanghai and Hong Kong, MBK Partners has 22 investee companies in its portfolio, with over US$28.7 billion in aggregate revenues and 41,065 aggregate employees. The firm’s investors include public and corporate pension funds, financial institutions, sovereign wealth funds and funds of funds from around the world as well as its home markets of Korea, Japan and China.
Exchange Rate
Historic exchange rates have been used to convert KRW to £ where relevant. In respect of each of the financial periods ended 23 February 2013, 22 February 2014 and 28 February 2015 the respective exchange rates used are KRW1,766:£1.00, KRW1,774:£1.00 and KRW1,721:£1.00. For current USD amounts a rate of USD1.52082:£1.00 has been used and for current KRW amounts a rate of KRW1,811.30:£1.00 has been used.
Cautionary statement
HSBC Bank plc, which is authorised by the Prudential Regulation Authority and regulated in the United Kingdom by the Financial Conduct Authority and the Prudential Regulation Authority, is acting exclusively for Tesco and for no one else in connection with the matters described in this document
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and is not, and will not be, responsible to anyone other than Tesco for providing the protections afforded to its clients nor for providing advice in connection with the matters set out in this document.
Barclays, which is authorised by the Prudential Regulation Authority and regulated in the United Kingdom by the Financial Conduct Authority and the Prudential Regulation Authority, is acting exclusively for Tesco and for no one else in connection with the Disposal and will not be responsible to anyone other than Tesco for providing the protections afforded to clients of Barclays nor for providing advice in relation to the Disposal or any other matter referred to in this announcement.
Forward looking statements
This document contains statements which are, or may be deemed to be, “forward looking statements” which are prospective in nature. All statements other than statements of historical fact are forward- looking statements. They are based on current expectations and projections about future events, and are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. Often, but not always, forward looking statements can be identified by the use of forward looking words such as “plans”, “expects”, “is expected”, “is subject to”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates”, “believes”, “targets”, “aims”, “projects” or words or terms of similar substance or the negative thereof, are forward-looking statements, as well as variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “should”, “would”, “might” or “will” be taken, occur or be achieved. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations. Forward-looking statements include statements relating to (a) future capital expenditures, expenses, revenues, earnings, economic performance, indebtedness, financial condition, dividend policy, losses and future prospects, (b) business and management strategies and the expansion and growth of Tesco’s operations, and (c) the effects of global economic conditions on Tesco’s business.
Such forward-looking statements involve known and unknown risks and uncertainties that could significantly affect expected results and are based on certain key assumptions. Many factors may cause actual results, performance or achievements of Tesco to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. Important factors that could cause actual results, performance or achievements of Tesco to differ materially from the expectations of Tesco, include, among other things, general business and economic conditions globally, industry trends, competition, changes in government and other regulation and policy, including in relation to the environment, health and safety and taxation, labour relations and work stoppages, interest rates and currency fluctuations, changes in its business strategy, political and economic uncertainty and other factors as may be identified in Part II (Risk Factors) of the circular. Such forward-looking statements should therefore be construed in light of such factors. Neither Tesco nor any of its directors, officers or advisers provides any representation, assurance or guarantee that the occurrence of the events expressed or implied in any forward-looking statements in this document will actually occur. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Other than in accordance with its legal or regulatory obligations (including under the UK Listing Rules and the Disclosure and Transparency Rules), Tesco is not under any obligation and Tesco expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The release, publication or distribution of this announcement in jurisdictions other than the United Kingdom may be restricted by law and therefore any persons who are subject to the laws of any jurisdiction other than the United Kingdom should inform themselves about, and observe, any applicable requirements. This announcement has been prepared for the purposes of complying with the UK Listing Rules and the information disclosed may not be the same as that which would have
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been disclosed if this announcement had been prepared in accordance with laws and regulations of any jurisdiction outside of England.
This announcement is not intended to, and does not constitute, or form part of, any offer to sell or an invitation to purchase or subscribe for any securities or a solicitation of any vote or approval in any jurisdiction. Shareholders are advised to read carefully the formal documentation in relation to the Disposal once it has been despatched. Any response to the proposals should be made only on the basis of the information in the formal documentation to follow.

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