Tesco plans $554-mn supermarket JV in China with China Resources

British supermarket chain Tesco will pay £345 million ($554 million) to set up a supermarket joint-venture in China with state-run supermarket and convenience store operator China Resources Enterprise.

The JV comes after Tesco, the third-biggest supermarket chain in the UK, failed to establish a foothold in the world's largest populated country and reflects its failure to expand internationally.

"Through this deal we have a strong platform in one of the world's most exciting markets and it will move us more quickly to profitability in China," said Philip Clarke, chief executive officer, Tesco.

The JV will be the leading retailer in seven of the eight most populous and highest GDP provinces in China.

Under the JV, Tesco will merge its 134 Chinese stores as well as its Chinese shopping malls with China Resources Vanguard business of 2,986 supermarkets and convenience stores in China and Hong Kong.

Hong Jie, chief executive officer of CRE, said, "The partnership will be strongly placed to lead the development of retailing in China and create value for shareholders and customers.''

China Resources will own 80 per cent of the JV, which is expected to be completed in 2014, while Tesco will own the remaining 20 per cent and get two board seats out of a maximum of 10.

Tesco will pay £185 million up front in cash and will make further payments of £80 million on completion of the merger and on the first anniversary of the deal, taking its total payments to £345 million.

The deal also gives Tesco an option to increase its stake in the JV to 25 per cent within the next five years or if the new company seeks an initial public offering.

The JV will operate hypermarkets, supermarkets, convenience stores, cash-and-carry wholesale businesses and liquor stores.

Tesco's Chinese business comprises 134 stores in 11 provinces, including Shanghai, Tianjin and Liaoning provinces. It owns 11 Lifespace shopping malls, eight in 50:50 JV's with local partners. Nine Lifespace malls are currently operational, of which two are wholly owned, with the remaining 10 malls under development.

The gross assets for Tesco's combined Chinese operations as at 28 February 2013 were £2,615 million and the net book value was £1,357 million.

Tesco China's sales for the years ended February 2012 and February 2013 were £1,520 million and £1,653 million respectively and its trading losses for the same periods were £77 million and £72 million.

China Resources Vanguard is one of the largest multi-format retailers in China by sales with a strong portfolio of well recognised and established formats.

The Hong Kong-listed company has an established nationwide infrastructure, with a store network covering 24 provinces which together have a population of approximately 1.1 billion.

The JV comes a month after Tesco exited the US market by agreeing to sell 150 of its loss making 200 Fresh & Easy stores in the US to Yucaipa, the investment vehicle of US billionaire Ron Burkle.

Under the deal, Tesco, which Tesco lost around $1.8 billion in its US business, paid the investment group £180 million to 150 stores off its hands, and plans to shut down the remaining 50 stores.

Tesco's exit from the US market comes two years after it  pulled out of the Japanese market. It said in August that it would fold its unprofitable Chinese operation into a state-run company as a minority partner.

The JV with China Resources brings down the curtain on Tesco's nine-year solo venture in China in which the retailer invested £1.5 billion - making it Tesco's latest aggressive international expansion to come a cropper.