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Tesco Scores a Super Thai Checkout Deal

Clara Ferreira Marques and Nisha Gopalan

(Bloomberg Opinion) -- Britain’s largest grocer is heading for the checkout in Southeast Asia with an impressively full trolley. Tesco Plc said Monday it had sold its Thai and Malaysian business to entities linked to Dhanin Chearavanont’s Charoen Pokphand Group for more than $10 billion, a heftier than expected price. It’s a bold bet on billionaire clout. Picking a buyer that already touches most of Thailand’s food chain and in the process taking on a newly revamped antitrust authority isn’t without risk.

Tesco joins a long line of international supermarket giants that have struggled to harness the potential of the region’s middle classes. The U.K. company had already retreated from Japan and South Korea, and completed its exit from China last month. But it had soldiered on in Southeast Asia and particularly Thailand, where it operates under the Tesco Lotus brand.

Outgoing Chief Executive Officer Dave Lewis was right to sell. The Asian business amounted to a modest 9% of Tesco’s total revenue in the first half of last year. It needed investment and Thailand’s economy is flatlining. Worse, the business was undervalued in a group that trades at close to 8 times forward Ebitda. The sale announced Monday, by contrast, was done at a multiple of 12.5 times – a premium even to Thai retailers. On a day when markets were crashing, Tesco shares were relatively resilient in London trading. Shareholders cheered plans for a 5 billion pound ($6.6 billion) special dividend, and will begin looking toward the next sale, in central Europe.

The bigger question may be the chosen buyer. CP Group, already highly indebted, will be betting on Tesco’s juicy property portfolio, plus cost synergies it can reap by pumping its food manufacturing businesses into the target’s supply chain. It will want to do that quickly. Funding the biggest-ever Thai purchase won’t have come cheap, even with rock-bottom interest rates and plenty of banks keen to finance deals.

This isn’t the end, though. The Office of Trade Competition Commission has said it could rule against any combination that grabs too much of the market. The regulator, recently restructured, may be keen to seize the opportunity of its first high-profile, consumer-facing case. Thailand’s pro-military government, on the back foot after setbacks including a devastating drought, may also want to bolster its consumer-protection credentials.

As ever in antitrust, market share can be understood differently. CP, hoping to keep the figure below 50%, will no doubt argue that its 7-Eleven outlets – plus a cash and carry business, and poultry, shrimp and other agricultural produce — don’t compete with Tesco’s hypermarkets. That’s questionable.

Dhanin is Thailand’s third-richest man. That doesn’t hurt in a country where his companies are stock-market heavyweights along with businesses owned by the two other bidders for the Tesco assets: Charoen Siri­vad­han­ab­hakdi’s TCC Group and Bangkok-based Central Group, owned by the billionaire Chirathivat family. His desire to take over the chain can’t be underestimated. Dhanin is buying back a business that CP Group founded in 1994 and sold to Tesco during the Asian financial crisis four years later. 

Tesco is clearly betting the argument will go Dhanin's way – so much so that it hasn’t included a break fee. It may well be right. Supermarkets, though, are a sensitive area for antitrust authorities, especially young ones. Britain’s Competition and Markets Authority last year scrapped J Sainsbury Plc’s plan to buy Walmart Inc.’s Asda and create the country’s largest supermarket chain. Shareholders should hold off cheering until they get delivery. 

To contact the authors of this story: Clara Ferreira Marques at cferreirama@bloomberg.netNisha Gopalan at ngopalan3@bloomberg.net

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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