Tesco prefers buyout firm MBK’s bid for South Korea unit, say sources: Reuters

British retailer Tesco PLC (TSCO.L) has picked private equity firm MBK Partners as preferred bidder to buy its South Korean unit, people with direct knowledge of the process said, in a deal that could be valued at as much as $6.6 billion.

The sale of its biggest overseas unit is set to be the first large divestment by Tesco, whose credit rating was cut to “junk” status by Moody’s and S&P in January after an accounting scandal and market share losses in Britain to discount chains Aldi and Lidl.

A disposal of the Korean unit, called Homeplus, could help Tesco cut debt and reclaim its investment-grade status sooner. It would be the largest private equity deal in Asia.

MBK bid around 7.8 trillion won ($6.61 billion), one of the people said. Another person, while not confirming the exact amount, said MBK’s bid price had gone “higher than expected” as the bidding process continued.

MBK beat out bids from a combination of buyout firms Affinity Equity Partners and KKR & Co (KKR.N) as well as from Carlyle Group LP (CG.O), the people said.

Seoul-based MBK, one of the largest Asia-based private equity firms, is backed in its bid by Singapore state investor Temasek Holdings [TEM.UL] and is seeking funds from South Korea’s National Pension Service (NPS).

Spokesmen for Homeplus and MBK declined to comment on Wednesday. Carlyle, KKR and NPS also declined to comment. The sources declined to be identified as the sale process is private.

Tesco shares opened up 1.5 percent in London on Wednesday but gave up their gains later to trade down 0.1 percent, in line with a weaker broader market.

Private equity firms were attracted to Homeplus due to its strong cash generation and valuable property assets. And several buyout firms have recently raised capital to invest in Asia, but a dearth of big targets in the region has left them with large unused funds, which also underscored their strong interest in Homeplus.

But South Korea’s hypermarket sector is saturated, with nearly one hypermarket per 100,000 people compared to the ideal ratio for the industry of one per 200,000, analysts noted.

Homeplus relied on hypermarkets for more than 80 percent of its 2014 revenue of 7.05 trillion won ($6.3 billion), and has booked at least two straight years of declines in same-store sales.

For Tesco, a successful conclusion of the Homeplus sale will enable it to focus attention on a planned sale of its Malaysian operations, valued at around $1.4 billion.