Tesco’s decision to beef up its in-house corporate finance is as clear an indication as any that the restructuring job at the under-pressure supermarket is far from over.
The Financial Times today notes that Tesco has started a search for a head of corporate development to lead a team focused on investment opportunities, portfolio reviews, disposals and mergers and acquisitions activity.
Although Tesco’s shares have recovered by some 22% so far this year, recent downgrades of its credit rating to junk status by Moody’s and Standard & Poor’s shows there is still plenty to do to sure up the retailer’s balance sheet.
The creation of this corporate finance role seems to signify two things. One, Dave Lewis’ strategic recovery plan (which didn’t go far enough for the ratings agencies) hasn’t yet been laid out in full; and secondly, the board does intent to strengthen the balance sheet and asset disposals are preferable to a rights issue.
Despite the credit rating downgrades, the need for disposals is not yet an emergency. The downgrades primarily affect Tesco’s ability to borrow and refinance existing borrowings (presuming Tesco has the cash to pay bondholders the ongoing interest payments), meaning the downgrades are more embarrassing than financially apocalyptic at this stage.
Some €600m of 5.125% euro bonds mature in 2015, which is a small proportion of its £15bn euro note programme. The amount of bonds maturing increases in 2016, when another £1bn of euro bonds and £200m of sterling bonds will mature, while 2017 sees €500m and US$1.35bn of corporate bonds mature.
Tesco has available committed bank facilities of £5bn, of which £2.6bn is in the form of revolving credit facilities that matures 2019.
So while the clock is ticking, Tesco looks to have a little time to sort out its balance sheet before wholesale refinancing is necessary. Crucially this means Tesco does not looking to facing a fire sale of assets.
It has already shed Blinkbox movies to TalkTalk and today music to Guvera (as well as ditching its e-books business after failing to find a buyer), but this has had a negligible impact on the balance sheet.
Other potential divestments look more significant and therefore any deal could take a more complex form than a simple sell off – a partial float for some assets being one option mentioned. A fire sale doesn’t require too much expertise to execute, the more bespoke divestments that Tesco may benefit from looks to be the key reason a new corporate finance team is being created.
So what is for sale? Market rumour certainly suggests valuable data business Dunnhumby will go – possibly through a £2bn sale to media giant WPP (Dave Lewis has already called in Goldman Sachs to advise on the future of the business). Giraffe and Harris + Hoole could go the way of BlinkBox, but won’t solve Tesco’s balance sheet problems. So that could leave Tesco Bank and its Asian retails operations (Thailand and Korea) – though Tesco is likely to be reluctant to quit these potentially strategically important markets entirely.
Dave Lewis has pledged to concentrate on the core UK business and address its falling sales - much to the City’s satisfaction. But this concentration on the core business will not be at the expense of all the other areas Tesco has expanded into. As the UK retail market continues to become ever more competitive, Tesco will need to maintain its presence in certain other potential growth areas if for nothing else than to mitigate operational risk.
Exactly what stays, what goes and in what format it goes will form the core of the new corporate finance team’s job. Whoever becomes its leader is unlikely to have a quiet couple of years.