This article first appeared in The Edge Malaysia Weekly on March 16, 2020 - March 22, 2020
THAILAND’s biggest agribusiness conglomerate, Charoen Pokphand Group, last week emerged the winning bidder for the Thai and Malaysian businesses of British retailer Tesco Plc, but it faces daunting challeges, particularly in Malaysia, given the local retail sector’s lacklustre performance. Moreover, as a foreign entrant, CP Group will have to adhere to a set of rules that local players are exempt from.
Although recently relaxed, the Guidelines on Foreign Participation in Distributive Trade Services in Malaysia 2020 will still require CP Group to sell 30% of the business to a local within three years of its entry into the market.
“Hypermarket operators must provide at least 30% bumiputera or Malay ownership in the company’s equity structure. However, a grace period of three years for compliance may be granted by the Distributive Trade Committee of MDTCA upon the approval of the applications made by the operators,” the rules read.
Extensions are sometimes given, as in the case of AEON BiG. The extension was granted possibly because the retailer had not been able to halt the losses of Carrefour’s hypermarket chain, which it purchased eight years ago.
Tesco’s local business is operated under Tesco Stores (M) Sdn Bhd, with Sime Darby Bhd as its 30% local partner.
Last week, Tesco announced that it was selling 86.9% of the Thai business and 100% of the Malaysian business to CP Group for an enterprise value (EV) of US$10.6 billion (RM45.2 billion).
CP Group — the operator of 7-Eleven convenience stores and Siam Makro Plc — prevailed over beer tycoon Charoen Sirivadhanabhakdi’s TCC Group Co and the Chirathivat family’s Central Group.
The EV of US$10.6 billion on a cash and debt-free basis represents a multiple of 12.5 times earnings before interest, taxes, depreciation and amortisation (Ebitda). The transaction values the Thai business at an EV of US$9.9 billion, including US$400 million in net cash, whereas the Malaysian business has an EV of US$700 million, including US$600 million of net debt.
“Enterprise value is market value plus debt. This means CP Group values the Malaysia business at US$100 million only as they have to take on US$600 million debt,” an observer explains.
Based on the latest available results on the Companies Commission of Malaysia’s website, in the financial year ended Feb 28, 2019, Tesco Stores posted a net loss of RM44.29 million on the back of RM4.38 billion in revenue. It also had accumulated losses of RM566.95 million and total liabilities of RM3.89 billion.
As a partner, what is Sime Darby’s portion?
“Sime Darby Bhd is aware of the overall proposed sale by Tesco Plc of Tesco Stores (Malaysia) Sdn Bhd, of which Sime Darby Bhd owns 30%. Both management teams are in contact with each other. There are several procedural matters that are typical to a joint venture of this nature that will need to be fulfilled before an announcement can be made. Sime Darby Bhd will make an announcement at the appropriate time,” the company said in an email to The Edge.
Nevertheless, reports have put Sime Darby’s portion from the deal at 30% of the US$100 million, which is US$30 million.
While it was announced that the deal was expected to be completed in the second half of 2020, sources tell The Edge that Tesco employees have been told that the transition from Tesco to CP Group would take a total of 12 months.
Tesco began operating in Thailand in 1998 and in Malaysia in 2002. In Malaysia, Tesco has a network of 60 stores, with two more scheduled to open this financial year. It also operates two distribution centres and nine convenience stores (c-stores).
Hurdles ahead
Based on latest data published by Retail Group Malaysia on behalf of the Malaysia Retailers Association available as at March 12, the supermarket and hypermarket retail subsector contracted in the first three quarters of 2019 and is expected to end the year on a negative note. In Malaysia, four foreign hypermarkets operators are loss-making.
Nevertheless, Etiqa Insurance and Takaful Bhd chief strategy officer Chris Eng says, “If anyone has a chance of turning around Tesco in Malaysia, it should be CP Group, given their strong retail experience in Thailand, among which is one of the best chains of 7-Eleven in the world.”
But before this, the deal has a potential hurdle. CP Group needs the approval of the Office of Trade Competition Commission to complete the deal. Bloomberg reported that the challenge would be to persuade the Thai antitrust agency to approve the deal as CP already controls a big portion of the market through the operation of 7-Eleven and Siam Makro.
Tesco Lotus, as it is called in Thailand, is said to be Thailand’s biggest supermarket chain, with 1,965 stores as at end-February 2019. The latest purchase could result in its market dominance.
If the recent relaxation in the rules governing foreign hypermarket operators in Malaysia is anything to go by, it is unlikely that Malaysia will object to the entry of CP Group. But if the Thai deal does not proceed, will the Malaysia deal be in jeopardy? Would CP Group want to buy just the Malaysian business?
It is noteworthy that the bidders were reportedly far keener on the Thai business than the Malaysian segment. However, it is understood that the sale was bundled as a package.
Another poser in Malaysia is whether the CP Group would want to continue the convenience store business held by Tesco in the country. Last August, The Edge reported that Tesco had until March 31 to seek a partner for the c-store business after Perbadanan Perwira Niaga Malaysia pulled out of its collaboration with the group. In Malaysia, if a hypermarket operator wants to venture into the c-store business, it would need to get a local partner with a 70% share. Will CP Group want to do that?
The way forward
Assuming CP Group manages to get through all the hurdles, what is next for the group?
Exastrata Solutions Sdn Bhd chief real estate consultant Adzman Shah Mohd Ariffin, a real estate agent and licensed valuer who has worked with a foreign hypermarket chain, says CP Group will need to address a few challenges that retailers commonly face in Malaysia.
One is the need for the competitive grocery market to have a unique selling proposition such as a niche, loyalty building strategy, consistent value-for-money offers and brand-recall investment.
“The stiff price competition by discount convenience stores in urban pockets, such as 99 Speedmart and KK Mart, have affected customer penetration for hypermarkets,” Adzman.
Adding to that is the strong competition from local discount players such as Mydin, NSK and Econsave, which have loyal customers.
Adzman says, however, that CP Group could be banking on the economic value of the properties to recover its investment. “For a number of the Tesco Hypermarket locations, the highest and best use is no longer as a hypermarket. Based on the surrounding developments and infrastructural improvements, the sites with sizeable land areas are now ripe for redevelopment and will be able to generate better gross development value. Some sites have excess land area, which can be developed without affecting the hypermarket,” he points out, adding that the rest of the sites can remain as they are.
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