May 27, 2014
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UK's Tesco says ends talks on Turkish business

May 27, 2014

ISTANBUL, Turkey - UK-based retailer Tesco has failed to reach a deal with unnamed third parties over its struggling business in Turkey, a new setback for Chief Executive Philip Clarke as he seeks to rein in global expansion to focus on reviving the business at home.

Tesco and the company's Turkish subsidiary Tesco Kipa, which it bought in 2003 and now operates 191 stores, made the announcement in brief statements on Tuesday.

Shares in Tesco Kipa fell 9.5 percent to 1.34 Turkish lira ($0.64), valuing the company at around 1.78 billion lira ($856 million). Tesco's shares were down 0.1 percent at 303.70 pence at 1000 GMT.

Under pressure to focus on turning around falling sales in Britain, where Tesco generates two thirds of its revenue, Clarke has already done deals to sort out other problem businesses abroad - in Japan, the United States and China.

"For Tesco, like in China, like in America, like in various other deals they've done, this is about a considerable amount of capital investment that hasn't produced any return," said Mike Dennis, analyst at Cantor Fitzgerald.

"This is probably going to lead Tesco to close more stores in the central part of Turkey and scale down its investment into Turkey. So by definition the drag on Tesco's group return on capital is going to continue."

Kipa said in its statement on Tuesday that Tesco's talks with various companies "regarding partnership options" had ended without agreement, while Tesco only said it had ended talks concerning "potential options" for its Turkey business.

Gradual improvement?

Instead, Tesco said it would accelerate a plan to focus the business on Kipa's heartland around Izmir on Turkey's western coast, which it has said is very profitable, while "minimising capital spending and improving profitability".

"The efforts of the team in Turkey are already evident in a stronger customer offer and improved performance and there is more we can do to drive stronger cash generation and returns," Tesco said in a statement.

Tesco has been restructuring Kipa's business in eastern Turkey around Ankara, where its stores are bigger and the brand is not so well known, closing nine loss-making stores in the 2013/14 fiscal year.

Tesco said last month it had seen a "gradual improvement" in like-for-like sales in Turkey over the 2013/14 year although revenue from the business fell 9 percent to 679 million pounds ($1.14 billion), as Kipa suffered from "strong competition and our relative exposure to large store formats".

A Tesco Kipa official who declined to be named told Reuters: "We think that Turkey is full of good opportunities and that Tesco has reached the right decision ... We think our performance in the last quarter is a good start on this path."

Tesco Kipa said in February it was in preliminary talks "with various companies regarding various options" after the Financial Times had said one possibility involved a combination with the country's biggest food retailer, Migros. Migros is owned by private equity firm BC Partners.

Last month, Clarke came under new pressure as Tesco reported a second straight year of falling profit and took a 734 million-pound charge on its European and Chinese businesses.

Tesco's British business is still losing market share even after Clarke invested over 1 billion pounds on improving services and stores, prompting the firm to abandon its industry-leading margin target two months ago.

$1=0.5936 British pounds
$1 = 2.0829 Turkish lira

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