Equity 14 October 2014, 9:44am

Beleaguered Tesco should sell foreign subsidaries - Morgan Stanley

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In order to maintain its positions on the British market Tesco should withdraw from its other markets, Morgan Stanley said in a research note. The exit would allow the UK retail chain to use its extra resources to compete more successfully with discount chains mushrooming in the UK.

Tesco could exit Hungary?

Supermarket giant Tesco has been struggling on its home turf for some time now, and analysts at Morgan Stanley now believe that the likely improvement of European growth next year could provide the beleaguered grocer an excellent opportunity to sell its foreign interest, Hungarian news portal nol.hu reported on Tuesday. Should Tesco decide to sell its foreign subsidiaries, the analysts believe the units in Thailand, South Korea and Eastern Europe could go up for sale.

Morgan Stanley sees a 40% chance of an actual sale, which, they believe, would materialise in case of exceptional market bullishness. The analysts stressed, though, that this is merely speculation at this point. The sale could take place if Tesco’s share price rose to GBP 245 (it closed at 180.60 on Monday). The analysts estimate that by selling all of its foreign units Tesco would rid of GBP 6.6 billion debt and its cash flow would also leap to GBP 4.9 bn.

Morgan Stanley’s analysts, however, believe there is a 50% chance that market outlook remains unchanged and Tesco’s share price drops to GBP 160. Under that scenario the company would have the power only to maintain its profitability level and take only the most crucial steps in terms of price competition.

Tesco under pressure

Although the company’s revenues have been rising over the last few years, analysts already project a drop both in revenues and profits for 2014 and 2015.

Share price plummets

The share price has been faring poorly for years. Lat time it took a plunge on 22 September when Tesco issued its fourth profit warning in the past three years. The company announced that its half-year profits may have been over-stated by as much as GBP 250 million, adding that four senior executives had been suspended from duty while the investigation into what went wrong is carried out.

The company is set to lose two more board members with the departure of the head of its audit committee and resignation of the company secretary, newspapers reported on Sunday.

Tesco’s company secretary, Jonathan Lloyd will leave the retailer next March, and Ken Hanna, its audit committee chairman and non-executive director, is also expected to stand down when his six-year tenure comes to an end later this year, the Financial Times reported, while adding that neither departure is linked to the recent discovery of an overstatement in profits by the food retailer.