Tesco Plc (TSCO) agreed to sell most of its Fresh & Easy chain to billionaire Ron Burkle’s Yucaipa investment company, allowing the U.K. grocer to exit the U.S. after a failed six-year foray into the world’s biggest economy.
Yucaipa will acquire more than 150 of Fresh & Easy’s near 200 stores as well as distribution and production facilities, Cheshunt, England-based Tesco said today. Those outlets not included in the transaction will be closed in the coming weeks.
Fresh & Easy has never made a profit since it was built from scratch in 2007. Tesco has invested about 1 billion pounds ($1.6 billion) in the business in that period. Many analysts saw it as a drag on resources at a time when Tesco is struggling to maintain its dominant share of the U.K. grocery market.
“Most people will just be relieved that the ongoing stream of losses from the U.S. will be over and the uncertainty is no longer hanging over us,” Richard Marwood, who helps oversee more than $700 billion at Axa Investment Managers in London, said today before the deal was announced.
Fresh & Easy, with shops in Nevada, California and Arizona, made a trading loss of 169 million pounds last year, compared with a deficit of 153 million pounds the previous year.
The chain distinguishes itself with a focus on budget-priced, healthy food and a predominance of own-brand items.
The total cash outflow relating to stores being closed should be no more than 150 million pounds, Tesco said today.
That includes an 80 million-pound loan from Tesco to a new company formed by Yucaipa, which is secured against Fresh & Easy’s distribution center in Riverside, California.
Separately, the U.K. grocer said it will receive warrants that can be exchanged for as much as 32.5 percent of the equity in the new company, YFE Holdings Inc.
Tesco will have “no ongoing financial exposure” after completion of the sale, which it expects within three months. More than 4,000 employees will transfer to the new owner.
“It’s a clean exit, with the majority of the business going to one acquirer and the purchaser having no recourse to Tesco and there being no lingering lease liabilities,” James Collins, an analyst at Deutsche Bank AG, said in a note.
The sale to Yucaipa “represents the best outcome for Tesco shareholders and Fresh & Easy’s stakeholders,” Tesco Chief Executive Officer Philip Clarke said in a statement. “It offers us an orderly and efficient exit from the U.S. market.”
Yucaipa expects to complete the purchase within three months, the Los Angeles-based company said today in a statement. “In the meantime, it is business as usual for most Fresh & Easy stores.”
The purchase will “give us a solid starting point to complete Tesco’s vision with some changes that we think will make it even more relevant to today’s consumer,” Burkle said in the statement.
Bloomberg reported June 12 that Burkle planned to buy Fresh & Easy and convert the stores to the Wild Oats brand. Frank Quintero, a Yucaipa spokesman, wasn’t immediately available to comment.
Burkle has sought investments and stakes in troubled companies, including a partnership to take over Barneys New York last year. He was also interested in buying part of grocery chain Supervalu Inc. (SVU:US), people familiar with the matter have said. Eden Prairie, Minnesota-based Supervalu sold some of its banners, including Jewel-Osco and Acme, to a Cerberus Capital Management LP-led team in March.
Same-store sales fell in eight out of Tesco’s 10 international businesses in the first quarter of the current financial year and international earnings slumped 22 percent to 990 million pounds in the 12 months through February.
Tesco exited Japan last year and said Aug. 9 it plans to merge its 131 stores in China with the country’s second-biggest hypermarket chain, ending nearly a decade of independent operations in the country as sales decline.
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