This article first appeared in The Edge Malaysia Weekly on December 23, 2019 - December 29, 2019

AFTER two decades in Malaysia, Tesco Stores (M) Sdn Bhd may call it a day as the loss-making retailer, with RM3.89 billion of debt, has someone knocking on its door.

The offer comes at a time when the retail outlook for the supermarket and hypermarket segment remains gloomy. Consider this, Malaysia has four foreign hypermarket players — Tesco, Hong Kong’s Giant, Japan’s AEON BiG and Middle East-based Lulu — all of which are loss-making (see table).

Note that these foreign retailers are governed by a different set of rules from the local players.

Data from Retail Group Malaysia (RGM), tabulated on behalf of the Malaysia Retailers Association, speaks volumes about the outlook for the supermarket and hypermarket segment. Retailers interviewed by RGM expect retail sales to contract by 9% in the current quarter ending Dec 31. This segment has been contracting for 10 straight quarters since the third quarter of 2017.

Naturally, it came as a surprise to the industry that there is someone who is keen on buying the business. Even Tesco’s Malaysian employees were taken aback by the announcement of a possible sale of the business, given that the retailer had put into motion a three-year transformation plan beginning in 2016, including the introduction of its new-generation store concept aimed at strengthening its business.

Could it be that the new investor is interested in the retail business or is it interested in the assets Tesco holds?

On Dec 8, The UK parent Tesco Plc announced that “following inbound interest, it has commenced a review of the strategic options for its businesses in Thailand and Malaysia, including an evaluation of a possible sale of these businesses.” It added that the evaluation of the strategic options is at an early stage, and that no decision concerning the future of Tesco Thailand and Tesco Malaysia had been made.

Malaysia and Thailand are the only countries in Asia where Tesco has stores. It has 1,951 stores in Thailand and 60 hypermarkets and nine convenience stores in Malaysia.

Etiqa Insurance and Takaful Bhd chief strategy officer Chris Eng tells The Edge, “Following the trend that was first observed in Europe, which has since followed in the more developed Asian markets of Hong Kong and Singapore, there has been a shift in consumer sentiment away from bulk purchases in hypermarkets towards smaller grocery shops.

“This has seen a rise of grocers such as Village Grocer and Jaya Grocer, even as hypermarkets have closed down. The exit of global chains in Asean has been driven by this. It will be difficult to find a buyer (for Tesco) as AEON [Co Ltd], which absorbed Carrefour some years ago, is still struggling to find a strong foundation. As a last resort, will Tesco be offered at a discount to its 30% partner Sime Darby Bhd?” he says.

AEON BiG (M) Sdn Bhd — which is 95.49% owned by Aeon Co and 4.51% by AEON South East Asia Sdn Bhd — purchased French retailer Carrefour’s ailing Malaysian operation, comprising 26 stores, in 2012 for an enterprise value (value of debt in the business minus cash in the business) of €250 million, but has yet to turn the business around (see table). According to AEON BiG’s website, it currently has 22 stores.

Dairy Farm International Ltd — which operates the Giant supermarket and hypermarket brand as well as supermarkets under the Cold Storage, Mercato and Jason’s Food Hall names — has been closing stores rapidly. From a peak of 147 stores in 2014, today the retailer appears to have only about 80 stores.

Incidentally, calls made to industry players reveal that market talk of Aeon Co being a potential suitor for Tesco has resurfaced. It was reported in 2015 that AEON Co was interested in purchasing Tesco’s stores to expand the AEON BiG chain.

Various reports value the Thai and Malaysian businesses at £6.5 billion to £9.5 billion. A Bloomberg report, quoting Ahmad Maghfur Usman, an analyst with Nomura Global Markets Research, says Tesco Malaysia’s enterprise value is US$2 billion. It is also worth noting that the Malaysian business generates just a fifth of the revenue of Thailand.

Asked to comment, one industry observer quips, “Who has that kind of money? The Chinese perhaps.” Indeed, the market is speculating that to buy a business this big, one would need deep pockets and the Chinese may be a possibility. Other potential interested investors are believed to be from Thailand and private equity funds. Names of Thai investors floating around the market include Central Group and Singha Corp.

Tesco Plc’s entry into Malaysia was in 2000 with Sime Darby Bhd as its 30% local partner. In 2002, Tesco opened its first store in Puchong. It enjoyed seven straight years of profitability from the financial year ended Feb 28, 2008 (FY2008) to FY2014. It slipped into the red in FY2015 and continued to post losses in FY2016 and FY2017. However, in FY2018 it bounced back into profitability, posting a net profit of RM22.81 million. Unfortunately, it has slipped into the red again in FY2019, posting a net loss of RM44.29 million.

Are Tesco’s assets valuable? “Their real estate value is high,” an estate agent tells The Edge. If Tesco’s financial reports on non-current assets are anything to go by, the retailer has some RM3.43 billion in assets.

According to sources, about 10 of its stores in the Klang Valley alone are worth about RM1 billion. And these stores have land available for development. Recall that it also inherited some eight stores, including in Ipoh and Penang, when Tesco bought Makro Cash & Carry Distribution in 2006. Of the 60 Tesco stores it operates, it is learnt that Tesco owns at least half of the inventory. Tesco also owns stores in Johor.

Last year, The Edge reported that Tesco was seeking an alternative source of revenue and was planning to venture into property development at its larger stores. It was looking for partners to help develop the sites. The large hypermarkets owned by Tesco include Tesco Extra Ampang, which is built on about 13 acres. This land alone is valued at some RM170 million. Tesco Ara Damansara, with about seven acres, is possibly worth RM100 million. The most valuable real estate owned by Tesco is believed to be the Mutiara Damansara store.

An estate agent says Tesco may be better off investing the RM100 million (estimated value of the Ara Damansara Store) in other commercial assets that could provide a 6% yield, as opposed to being involved in the retail business, which is not growing by as much.

Should Tesco exit Thailand and Malaysia, its remaining stores outside the UK would be in Ireland, the Czech Republic, Hungary, Poland and Slovakia. 

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