Struggling retail giant Tesco (LSE: TSCO) has been in negotiations to sell off parts of its international retail empire for almost a year now.Today, the companynamed a consortium led by South Korean private equity firm MBK Partners as the preferred bidder for its business in the country.
Tescos South Korean arm was considered to be one of the retail giant most attractive assets several years ago. However, a brutal price war within the South Korean retail market, along with the introduction of draconian government regulations designed toprotect smaller stores have hit sales.
Its believed thatMBK Partners is offering $6.4bn for Tescos Korean business, approximately4.2bn at current exchange rates. Whats more, according to certain reports, Tesco is set to receive a $844m (549m) dividend from its Korean business before the sale completes.
Multiple sales
Tesco is in the process at least three parts of its global business, including the South Korean arm,data analysis businessDunnhumby, andTesco Mobile. These sales areintended to relieve pressure on Tescos balance sheet. The group reportedadjusted net debt of 8.5bn at the beginning of this year.
And so far, things seem to be going to plan. If Tesco receives 4.8bn from the sale of its South Korean business, the group will be able to reduce net debt by more than 50%. Moreover, Tescos management believes that the sale ofDunnhumby could raise as much as1bn although its believed bidders are preparingoffers of about 700m or less. Still, an additional 700m will help reduce Tescos net debt further.
If everything goes to plan, in the best-case scenario Tescos adjustednet debt could fall by 65% to 3bn when both of these sales are complete.
Waiting for an update
Tesco should be able to update the market further on the asset sales at some point during the next week or two. Final bids for the Asian business were due on Monday, and the final bids forDunnhumby are due in a few weeks.
Unfortunately, if everything doesnt go to plan, and Tesco receives less from the sale of assets than initially expected, the group could be forced toconduct a rights issue.
According to creditratingsagency Moodys, Tesco needs to find 5bn to relieve the pressure on itsoverstretched balance sheet. Initial figures suggest that the sale of Tescos South Korean business,Dunnhumby and Tesco Mobile could raise enough to meet this target, although until the final bids are announced, its not possible to say for sure if this will be the case.
But all in all, its clear that Tescos outlook is improving gradually. While the groups sales may still be falling, Tesco has made real progressrestructuring its operations and selling off non-core high-cost assets such as its troubled digital entertainment business Blinkbox, as well as its fleet of private jets. Additional asset sales will strengthen the companys balance sheet further.
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Rupert Hargreaves owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.