Thursday 3 September 2015

Tesco PLC's Balance Sheet Re-set: why selling South Korea may not be enough

Following today's confirmation of the sale of its South Korean operation to MBK Partners, and according to The Motley Fool, Tesco is now in the final stages of its asset sell-off aimed at reducing its adjusted net debt of £8.5bn by the £5bn Moody’s rating agency believes is necessary to meet stock-market expectations.

Ideally, asset sales will yield: 
- South Korea £4.2bn
- Dunnhumby between £700k and £1bn

Given global stock-market uncertainties it is possible that these sales may not yield sufficient sums, in which case Tesco will have to resort to seeking more cuts within the business and/or attempt a Rights Issue to raise cash.

Rights Issue Risks
Whilst the latest share price is a daily reminder of stock market opinion re Tesco’s potential, actually asking shareholders to invest more in a falling share price - via a Rights Issue - would not only cause investors (and analysts) to take a really fundamental view of Tesco’s prospects of a successful turnaround in terms of re-balancing the business, but also question the retailer's ability to regain market share in a flat-demand market, re-assess their competitive edge vs. available alternatives and question their ability to compete with newer retail players.

And this apart from a Rights Issue yielding less as their share price falls in the current stock-market turmoil…

This leaves further cost-cutting in the business, a possible re-set of the product re-set, and a more aggressive approach to selling off redundant space, at any price…with no sign of a fat lady singer anywhere…

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