Tesco In Vanguard Of China Merger

By Mark Kleinman, City Editor

Tesco is on the verge of an agreement to merge its operations in China with the country's biggest retailer as it takes another step towards reshaping its international business.

Sky News has learnt that Tesco is expected to announce on Friday that it has signed a memorandum of understanding to combine its store estate in the world's most populous country with that of Vanguard, a subsidiary of China Resources Enterprise (CRE).

The deal, if completed, is also expected to involve Tesco paying several hundred million pounds to CRE as the British company's chief executive, Philip Clarke, grapples with the challenges of maintaining a viable business in China.

People close to the situation said Tesco was likely to emerge from the negotiations with CRE with a 20% stake in the enlarged business but cautioned that finalising an agreement was likely to take several months.

The new joint venture would have more than 3000 shops and would be easily the largest retailer in seven of the eight mainland Chinese provinces with the highest GDP rankings in the country.

Tesco's decision to abandon its go-it-alone approach in China may suggest that it is continuing its  international retrenchment after a decade of expansion which saw it become the world's second-biggest retailer behind Wal-Mart.

In 2011, Tesco announced plans for an aggressive expansion of its business in China, which currently has about 130 stores.

Analysts said the CRE joint venture would enable Tesco to reduce the amount of capital it committed to its business in China while accessing the greater local expertise of its new partner.

"It's a sensible-sounding deal because it will allow them to focus more on the core UK market," said one.

The City has been braced for a deal in China since a Financial Times report in May which said that Tesco was exploring a joint venture.

Mr Clarke is understood to have travelled to Asia in recent weeks to thrash out the agreement with CRE and Vanguard executives.

The Chinese joint venture will enable Mr Clarke and his executive colleagues to intensify their efforts to re-energise the British business which fuelled Tesco's rapid growth under his predecessor, Sir Terry Leahy.

Since taking over last year, Mr Clarke has had to contend with the fallout from the horsemeat scandal but has begun to win over shareholders with new ideas to reinvigorate its most important market.

Earlier on Thursday, Tesco unveiled a new concept store in Watford containing areas designed to appeal to diners and young mothers, part of Mr Clarke's campaign to re-engage consumers with the Tesco brand.

The chain's boss still has other international challenges to overcome, even if the CRE deal does get signed.

People close to the situation said Tesco was likely to decide in the coming weeks what to do about the future of its loss-making Fresh & Easy chain in the US, with a closure as well as a sale still on the table as potential options.

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