New Tesco boss likely to sell assets to fund recovery plan

Thu Oct 16, 2014 12:21pm EDT
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By Kate Holton, Simon Jessop and James Davey

LONDON (Reuters) - Just six weeks into his job, Tesco (TSCO.L: Quote) boss Dave Lewis must look at selling assets in Britain and abroad as he battles to raise funds to pull the world's No.3 grocer out of the deepest crisis in its 95-year history.

Trading at the British retailer has deteriorated to such an extent that its debt and ballooning pension deficit mean it could do with more cash. And that's even before it starts to consider the cost of a plan to revive sales.

Some analysts and investors think Lewis should take advantage of his status as a new arrival to ask shareholders for money, rather than selling off valuable businesses such as its stores in Thailand or customer data specialist Dunnhumby.

But a rights issue, which some think should top 3 billion pounds ($4.8 billion), could prove a hard sell when Tesco is in the midst of investigations into the discovery of a 250 million pound black hole in its accounts.

Plus, several investors want to see the recovery plan first.

"No rights issue without a detailed strategy and without first trying to sell non-core assets at good prices," said David Herro of investors Harris Associates, which recently cut its stake in Tesco to 1 percent from 3 percent.

Harris, which has $130 billion of assets under management, is not convinced Tesco will need a rights issue at all, unless UK operating profitability totally collapses.

Yet pressure is building on Tesco's finances. Its adjusted net debt of 6.6 billion pounds is now 3.2 times operating cash flow, way ahead of a company target of 2.5 times and likely to rise, according to Morgan Stanley. Its debt-to-equity ratio is 0.76 versus an industry median of 0.53, Reuters data show.   Continued...

Pedestrians walk past a Tesco store in Bow, east London August 29, 2014. REUTERS/Paul Hackett