Tesco agrees merger with China retailer

Tesco is to merge its 131 stores in China with the second-biggest hypermarket chain in the country, ending almost a decade of independent operations as sales decline.

The UK retailer plans to form a joint venture with China Resources Enterprise Ltd that will also run supermarkets, convenience stores, and other outlets in China, Hong Kong, and Macau, according to statements from both companies.

Tesco will have a 20% stake in the tie-up with China Resources holding the remaining 80%.

The deal would allow Tesco to maintain a presence in the world’s second-largest economy where it has been closing stores amid greater competition from regional rivals such as Sun Art Retail Group Ltd. Tesco is exiting international markets after almost two decades of aggressive expansion into central Europe, Asia, and the US took the focus off its home market.

“Such an arrangement keeps Tesco exposed to the fast-growing Chinese market, but allows the company to expand in a much more capital-light way,” Barclays analysts, including James Anstead, wrote in a note to investors.

Retailers such as Tesco are facing slowing economic growth and rising competition in China, where the economy expanded 7.5% in the second quarter from a year earlier, the second straight deceleration.

China Resources and Wal-Mart Stores Inc are tied for second place in the country’s hypermarket sector with an 11% share each last year. That compares with a 14% share held by Sun Art, backed by France’s Groupe Auchan, according to Euromonitor International. Tesco ranked eighth with a 2.4% share.

The proposed deal “is consistent with Tesco’s stated strategy of focusing on profitable routes to growth in fast- growing but less mature markets, with a disciplined approach to the allocation of capital,” Cheshunt, Tesco said in the statement.

Tesco, which paid £40m (€46.4m) to leave its Japanese joint venture, has also said it will leave the US. China Resources would gain market share in the Asian country’s hypermarket industry, where sales will increase 50% to 864bn yuan (€105bn) by 2015, according to Euromonitor.

Tesco may pay several hundred million pounds to combine their businesses in China, a source said.

— Bloomberg