Tesco needs the money back home to plug the hole in its pension plan and cut overall debt.
Photograph by Chris Ratcliffe — Bloomberg via Getty Images

World's third-biggest retailer just got a whole lot smaller as it tries to fills gaps in a leaky balance sheet.

By Reuters and Fortune Editors
September 7, 2015

Britain’s Tesco Plc TSCDY , the world’s third-largest retailer has agreed to sell its South Korean business to a group led by private equity firm MBK Partners for $6.1 billion, making its first major disposal since it hit financial difficulties.

Seeking to raise funds to cut debt and focus on its troubled domestic business, Tesco said it would sell Homeplus, its biggest overseas unit, to a group of investors led by MBK and including the Canada Pension Plan Investment Board, Public Sector Pension Investment Board and Singapore’s sovereign wealth fund, Temasek Holdings.

Tesco has been looking to make disposals after a slowdown in its home market led to a string of profit warnings and the reduction of its credit status to junk. The Korean business was an obvious candidate after its business slowed down in response to new local regulation designed to help smaller stores compete against supermarket chains. With its powerful local partner Samsung, Homeplus had thrived in the years before Korea introduced that regulation, and Tesco had succeeded where Walmart Stores Inc. WMT and France’s Carrefour SA CRRFY had failed.

“This sale realizes material value for shareholders and allows us to make significant progress on our strategic priority of protecting and strengthening our balance sheet,” said Tesco Chief Executive Dave Lewis, a former Unilever executive who was hired last September to lead a turnaround.

Under the terms of the largest-ever private equity transaction in Asia, Tesco would receive 4 billion pounds ($6.07 billion) in cash. After adjustments for tax and transaction costs, the net cash proceeds will be around GBP3.35 billion.

Tesco, which said in April it had net debt of GBP8.5 billion and a pension deficit of GBP3.9 billion, said the Homeplus disposal would reduce its indebtedness by 4.225 billion pounds.

“(The) price looks OK,” said one major Tesco shareholder.

“I suspect that despite the earnings dilution the market will take a positive view of the deal as it strengthens the balance sheet.”

Shares in Tesco, down 19% over the last year, slipped 0.6% percent by 0900 GMT after an initial rise, making it one of the worst performers in the local benchmark index.

Reuters had previously reported that MBK was the preferred bidder for Homeplus, which has 140 hypermarkets, 375 supermarkets and 327 convenience stores. However, the involvement of the Canadian pension fund was new.

The MBKP consortium said it plans to invest 1 trillion Korean won ($831 million) in Homeplus over the next two years to boost its competitiveness.

Other MBK assets include insurer ING Life Korea, bought for about 1.27 billion euros in ING Group’s exit from the country in 2013, and Korean water purifier seller Coway for about $1.1 billion, which it is considering selling again.

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