TOKYO/LONDON Tesco (TSCO.L), the world's No.3 retailer, has ended a nine-year attempt to crack Japan's tough retail market by effectively paying Aeon Corp (8267.T), the country's No.2 general retailer, to take its loss-making business there off its hands.
The deal, which will allow Tesco to focus on fixing its main British business after a shock profit warning in January, will inevitably re-heat speculation over the group's long-term commitment to its much larger loss-making Fresh & Easy business in the United States.
Many foreign retailers have struggled in Japan, hampered by fickle consumer tastes, a super-competitive landscape and prolonged, profit-sapping deflation. France's Carrefour (CARR.PA) and Britain's Boots ABAQUO.UL are among the firms to have pulled out over the past decade.
The move is also the latest in a series by store groups exiting weaker markets as they struggle with sluggish demand in many developed economies. Carrefour announced a deal on Friday to pull out of Greece.
Tesco, which trails Carrefour and U.S. industry leader Wal-Mart (WMT.N) by annual sales, put the Japanese business up for sale last August, hiring Goldman Sachs (GS.N) to find a buyer.
Japan is the smallest of Tesco's 13 international businesses, consisting of 117 stores in greater Tokyo.
TWO STAGE EXIT
The deal with Aeon, first reported by Reuters, will see Tesco exit Japan in two stages.
In the first phase, it will sell 50 percent of its shares in Tesco Japan to Aeon for a nominal sum. This will result in the formation of a joint venture with Aeon.
Tesco will then invest 40 million pounds ($63 million) as a joint venture partner to finance restructuring, after which it will have no further financial exposure to the Japanese business.
"Given ongoing trading losses of about 30 million pounds after approaching a decade in the market, Tesco appears to our minds to have taken the correct approach with funded withdrawal," said Shore Capital analyst Clive Black.
He said it showed chief executive Philip Clarke is bringing greater focus and capital discipline to Tesco.
The deal will help Aeon, which trails Japan general retailer Seven & I Holdings (3382.T) in terms of market value, expand its reach in its home market as it tries to drive growth.
Prior to the Tesco purchase, Aeon had spent more than $775 million over the last five years, according to Thomson Reuters data, including taking stakes in Japanese supermarket chains Maruetsu and Marunaka.
Tesco's shares were up 0.5 percent at 302.65 pence at 0625 EDT, slightly outperforming the STOXX Europe 600 retail index .SXRP. Aeon shares closed up 0.63 pence at 961 yen before the announcement.
FOCUS ON UK TURNAROUND
After a surprise profit warning in January, Tesco is focusing on turning around its British business, which accounts for over 70 percent of its trading profit. Last week the firm posted a drop in underlying first-quarter British sales as its recovery plan struggles to gain traction.
In April, Clarke rejected shareholder calls to pull the plug on Fresh & Easy but said he did not expect the chain to break even until its 2013/14 year, compared with the end of 2012/13 previously.
Last week Tesco reported underlying sales growth at Fresh & Easy slowed to 3.6 percent in its first quarter from 12.3 percent in the fourth quarter, prompting renewed calls for management to reassess its strategy for the U.S. business.
(Additional reporting by James Topham in Tokyo; Editing by Richard Pullin and Mark Potter)