Tesco’s rearguard disarray
Drastic Dave Lewis built his reputation at Unilever by turning around poorly performing operations in difficult territories including Latin america.
at Unilever he had the comfort of a strong balance sheet and a manageable pension-fund deficit, a luxury he doesn’t have as chief executive of tesco.
Lewis has decided that the fastest way to cut the debt pile of £22bn, which has led to tesco bonds being accorded junk status, is to sell overseas crown jewels. this might make creditors and investors with a shortterm time horizon feel more comfortable but it is the wrong turn for the grocery giant.
it takes years, if not decades, to build strong overseas offshoots.
tesco may have been on the cusp of something important in california when Phil clarke threw in the towel in the Us in an effort to appease anxious investors.
What those shareholders failed to recognise is that the real problems for tesco were at home where its portfolio of superstores had become over-developed.
it also had become so fixated on generous margins that it felt immune to the challenge of no-frills competitors Lidl, aldi, Poundland and asda.
if reports from asia are to be believed it now looks as if Lewis is to sell tesco’s mature Korea operation ‘Homeplus’ to a locally led private equity consortium for $6.4bn (£4.2bn) and that Malaysia could be next.
admittedly, the performance of Homeplus has sagged over the past couple of years. as in the UK, there may be too many hypermarkets in south Korea and changes in trading laws have cramped tesco’s style.
However, selling overseas operations in fast-growing parts of the world looks like a terribly backward step for one of few the British firms which has successfully pursued an international strategy with the aim of earning up to 50pc of income overseas.
Lewis should perhaps have listened to some wiser heads: one of the greatest regrets of former Marks & spencer chief executive Lord rose, brought into the company at its lowest moment in 2004, is that his predecessors had defenestrated the European and overseas operations which had been carefully nurtured over generations.
rose and his successor Marc Bolland believe that M&s lost a least a decade globally as a result of the short-term behaviour of the previous regime of Luc Vandevelde and roger Holmes.
Former tesco boss sir terry Leahy likes to recount that it took decades of investment and losses before Procter & Gamble established itself as one of the strongest fast-moving consumer goods companies in Japan, a notoriously difficult environment for foreign firms.
it is hugely difficult to run a major corporation with the anvil of heavy debt. But one shouldn’t forget that interest rates are at record lows and tesco still dominates the UK’s grocery market and is a cash generating machine. Debt can always be reorganised with a degree of willpower.
Jettisoning sound operations in exciting markets such as Korea and Malaysia may be worth a few pence on the share price now. it could be regretted deeply later on.
Over the hedge
cHina’s equity meltdown is testing the mettle of hedge funds. the chairman of Man Group’s china investments Li Yifei is reportedly helping the financial authorities in their enquiries and Mayfair-based crispin Odey is enjoying the sweet rewards of taking a large bet against shanghai stocks.
not all are so fortunate. at least three big Us hedge funds – Greenlight capital, Pershing square and third Point – reportedly have lost big as a result of ill-fortune in china. Greenlight, run by high- profile investor David Einhorn, has lost 14pc as a result of china’s woes. the fund was already down 9pc at the end of July.
should we care about a bunch of wealthy people making or losing fortunes? Of course we should. in the search for better performance in a low-interest world many conventional investment managers working for pension funds and the like have chosen to swallow the hefty fees charged by hedge funds in the hope of stronger returns.
they might have been wiser to follow the example of california’s $300bn (£196bn) calpers fund that has dumped hedgies from its portfolio for failing to justify big fees for average if not lousy – performance.
Others may consider following suit after the muddle in the Middle Kingdom.
Sporting chance
sHarEHOLDEr advice group Pirc excels itself in its latest bulletin when discussing how investors should vote at the upcoming annual meeting of Mike ashley’s sports Direct.
‘Employment standards, board governance, remuneration and auditor rotation are the primary concerns at this high-profile FtsE 100 retailer,’ it says in a devastating note. none of that seems to have interfered with the company’s supercharged trading.
ashley, with more than 50pc of the stock, clearly feels that governance is overrated.