Britain’s biggest retailer, Tesco, has agreed to form a venture with China Resources Enterprise Ltd (CRE, 華潤創業), but first-half profit fell by a third amid “challenging” conditions in Europe, it said yesterday.
The deal in China would create a market leader, Tesco said.
“Tesco and CRE today announce that they have entered into definitive agreements to combine their Chinese retail operations to form the leading multiformat retailer in China,” a statement said.
The companies revealed in August that they were in exclusive talks over a deal.
London-listed Tesco — the world’s third-biggest supermarket group after US retailer Wal-Mart and No. 2 Carrefour of France — added that the move was part of its international strategy to tap further into fast-growing economies.
Under the deal, Hong Kong-listed CRE will have a stake of 80 percent and Tesco will have 20 percent, but this can rise to 25 percent after five years.
“We are delighted to work with CRE to create the leading Chinese retail business,” Tesco chief executive Philip Clarke said in the statement.
“Through this deal we have a strong platform in one of the world’s most exciting markets and it will move us more quickly to profitability in China,” he said.
“This is very good news for customers and shareholders and a further demonstration of our commitment to build sustainable, profitable businesses, establish multichannel leadership in all of our markets and pursue disciplined international growth,” he added.
The new venture will combine Tesco’s 134 Chinese branches, as well as its Chinese shopping mall business with the China Resources Vanguard business of 2,986 outlets.
Tesco will make a cash contribution of ￡185 million (US$300 million) to the venture. It will also pay ￡80 million to CRE following completion and another ￡80 million on the first anniversary.
The deal is expected to be completed in the first half of next year, but remains subject to regulatory and CRE shareholder approvals.
The British supermarket chain also announced yesterday that after-tax profit dived 33.6 percent to ￡820 million in the first half of its fiscal year, or 26 weeks to Aug. 24. That compared with a net profit of ￡1.235 billion in the same period a year before.
“The challenging retail environment in Europe has continued to affect the performance and profitability of our businesses there,” Clarke said in the earnings release.
“The investments we have made to improve our offer for customers in the region are already starting to take effect and we expect a stronger second half as a result,” he said.