China Resources Enterprise Ltd. (291), the state-backed retail and beer conglomerate, said it may partner with Tesco Plc (TSCO) to bid for billionaire Li Ka-shing’s Hong Kong supermarket chain.
China Resources may raise debt and will consider selling “non-core assets” to fund a purchase of the ParknShop chain, Frank Lai, chief financial officer for the Chinese company, said at an earnings briefing in Hong Kong yesterday.
Li’s biggest company, Hutchison Whampoa Ltd. (13), is considering selling the grocer, one of the two largest chains in Hong Kong’s $6.6 billion supermarket industry. ParknShop attracted eight offers from suitors including China Resources, people with knowledge of the process said this month.
“We will consider to bid with Tesco; it’s one of the discussions we have with them,” Lai said. The purchase could help China Resources “increase market share, improve efficiency and achieve economy of scale” in Hong Kong, he said.
ParknShop is a “quality asset” well operated by Hutchison Whampoa, the executive said, declining to say how much his company would be willing to pay.
China Resources this month announced a joint venture with Tesco that will see the U.K. firm merge its 131 stores in China with the Hong Kong-based company. China Resources will hold an 80 percent stake in that tie-up, the companies have said.
The completion of that deal would end nearly a decade of independent operations for Tesco in mainland China, where it has been closing stores and seen sales decline.
Tom Hoskin, a spokesman for Cheshunt, England-based Tesco, declined to comment on China Resources’ remarks. Li, Asia’s richest man, has a net worth of $26.9 billion, according to the Bloomberg Billionaire’s Index.
China Resources dropped 2.32 percent at HK$23.15 in Hong Kong as of 11:06 a.m. today. The stock has slumped 17 percent this year, compared with a 4.2 percent decline for the benchmark Hang Seng Index. Tesco fell 0.5 percent to close at 363.20 pence in London trading yesterday.
A merger with ParknShop could allow China Resources to leapfrog Singapore-listed Dairy Farm International Holdings Ltd. (DFI) to become Hong Kong’s largest supermarket operator.
ParknShop had 33 percent of the Hong Kong grocery market in 2012, after Wellcome, controlled by Dairy Farm, with 40 percent, according to researcher Euromonitor. CR Vanguard Supermarket, run by China Resources, ranked third with 7.8 percent.
ParknShop, which had revenue of HK$21.7 billion ($2.8 billion) last year, has more than 270 of its 345 outlets in Hong Kong. Sales growth in the city’s supermarket industry slowed to 7.9 percent in May from last year’s annual increase of 11 percent and a 2011 peak of 13 percent, government statistics show.
Hong Kong’s surging rents and a slowing grocery market could deter buyers from offering top price for the chain, analysts said. High rents will be factored into the bidding price for ParknShop, Lai said yesterday.
Hutchison is seeking $3 billion to $4 billion for ParknShop, a person familiar with the matter said last month.
“The Hong Kong business is profitable and a cash cow, but the valuation looks expensive and the growth prospects aren’t big,” said Anson Chan, Hong Kong-based analyst at KGI Asia Ltd, which has a underperform rating on China Resources.
Private-equity firms KKR & Co. (KKR:US) and TPG Capital also submitted preliminary bids for ParknShop, two people with knowledge of the process said this month. Sun Art Retail Group Ltd. (6808), Japan’s Aeon Co. (8267), Lotte Shopping Co. (023530), Woolworths Ltd. (WOW) and Wesfarmers Ltd. (WES) also made preliminary offers, people with knowledge of the matter said.
“Obviously there are lots of people competing for this -- if they get it at the right price it’s a very good move for Tesco,” Michael Dennis, an analyst at Cantor Fitzgerald, said in London by phone.
On China’s mainland, Tesco has faced a slowing economy and competition from regional rivals such as Sun Art. The U.K. retailer scaled back its efforts in China last year to focus on building out more profitable businesses, Chief Executive Officer Philip Clarke said in April. The company has adopted a more “cautious stance” in the country and closed five underperforming outlets last year to focus on its strongest regions, it said in April.
Sales for Tesco’s China stores opened at least a year dropped 4.9 percent in the first quarter amid consumer concern over bird flu and weaker demand for pork following a national food safety scare.
China Resources Enterprise yesterday reported a 54 percent drop in first-half profit as weaker economic growth and a government push to curb public expenditures hurt demand. The company, which has a joint venture with SABMiller Plc (SAB) producing China’s largest beer brand, also runs food and beverage businesses.
China Resources and Wal-Mart Stores Inc. both had a 11 percent share each in China’s hypermarket industry last year. That lags the 14 percent share by Sun Art Retail, backed by France’s Groupe Auchan SA, according to Euromonitor International.
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