February 24, 2014 / 11:04 AM / 3 years ago

Tesco in talks on future of Turkish business

3 Min Read

A shopper passes a Tesco supermarket in London October 5, 2011.Luke MacGregor

ISTANBUL/LONDON (Reuters) - Tesco (TSCO.L), the world's No. 3 retailer by sales, is in talks with several companies over a possible restructuring of its struggling business in Turkey.

The British retailer has been in Turkey since 2003 but has suffered poor trading from its 191 stores recently, with underlying sales at Tesco Kipa (KIPA.IS) falling 10.7 percent in its second quarter to the end of August.

Last October, Tesco said its business in eastern Turkey could be restructured, but it would not exit the country.

Under pressure to turn around falling sales in its main domestic market, Tesco has done deals to sort out problem businesses in Japan, the U.S. and China and analysts have speculated that Turkey could be next.

"Tesco is in the first stages of talks with various companies regarding various options," Tesco Kipa said in a statement to the Istanbul stock exchange on Monday.

It did not name any of the companies or any of the options. A spokesman for Tesco declined to elaborate.

Kipa's statement was prompted by a Financial Times report on Friday, citing people familiar with the situation, which said Tesco was looking at combining its operations in Turkey with the country's biggest food retailer Migros (MGROS.IS).

Migros is owned by private equity firm BC Partners.

"BC Partners periodically evaluates various alternatives for all its existing investments including Migros," Migros said in a statement to the Istanbul bourse on Monday.

Shares in Kipa jumped 9.3 percent to 4.23 lira in early trade in Istanbul, outperforming the main share index .XU100 which was slightly higher.

Shares in Tesco were down 0.1 percent at 334.7 pence at 4.33 a.m. ET.

Analysts said they saw merit in a possible Turkish joint venture, speculating that a deal could be structured in a similar way to Tesco's move in China, where it took a smaller share of a bigger group.

In October, Chief Financial Officer Laurie McIlwee said the firm had a very profitable business around Izmir on Turkey's western coast. But he said its business in the east around Ankara and Anatolia, where its stores are bigger and the brand is not so well known, lacks "critical scale". He said it was this business the firm needed to work out what to do with.

Tesco management will likely be pressed on Turkey when they make a presentation to investors and analysts on Tuesday called "Winning in a new era of retail".

The company is 22 months into a turnaround plan for its UK business that has seen over 1 billion pounds ($1.7 billion)invested in store revamps, more staff, new product ranges and pricing initiatives.

Despite that, sales at British stores open over a year, excluding fuel and VAT sales tax, fell 2.4 percent in the six weeks to January 4.

Some analysts say Tesco may use Tuesday's event to formally abandon its operating margin target of 5.2 percent, the highest in the industry.

Editing by Erica Billingham

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