Thursday, 12 September 2013

When you pay to sell a business


Mergers & Acquisitions are often the glamorous side of business. CEOs love  them - you go through the excitement of doing a deal, get on to the papers and TV, become famous etc etc. Most of the haggling on the deal is on the price - how much the buyer is willing to pay the seller. But how about a M&A transaction where the seller has to pay the buyer in order for the buyer to buy the business !! Fanciful ? Well, that's exactly what has happened with the sale of Fresh & Easy by Tesco to Ron Burkle.

Tesco is an UK based grocery retail giant; it is the third largest retailer in the world. From the UK, where it is a household name, it has expanded in Europe and Asia. But in the US, the largest retail market in the world, Tesco was non existent. In 2006, it decided to foray in to the US with the branding  of Fresh & Easy - in small store grocery format, primarily in the Western states. It never took off and Tesco faced mounting losses despite opening some 200 stores. Its investment and trading losses cumulatively mounted to some £ 1.8 bn. Something had to give.

Tesco tried to sell, but there was no buyer. Finally it found a buyer willing to take it on, but only if Tesco lent him £ 150 m in loans. This is unusual - we have heard of companies being sold for $1, but for something to be sold at negative value is rather unique. The reason why Tesco was willing to do this was simply that the cost of closing the stores and making all the employees redundant would have been far greater than what they were able to finally strike in the deal.

Why is Ron Burkle doing this deal. Evidently he believes he can make a success of this business. You have to be somewhat sceptical about this - If Tesco, a great company, could not succeed, could he ? But then in the retailing world, the US is for Americans and Europe is for Europeans. Even Walmart has not succeeded in creating a great business in Europe despite acquisitions. And no European retailer has really succeeded in the US.  Not sure why this is so, for you would expect retailing to be a pretty similar business anywhere, but that's the way it is.

It must have been extremely humiliating for Tesco to do this deal. Quite apart from paying somebody to take away a business, it represents a failure of their strategy to enter the US. They are admitting defeat and walking away, perhaps not to enter back for a long time, if at all. Its actually a more far reaching retreat for Tesco - they recently announced that they were in negotiations to put their Chinese business in a joint venture with a Chinese company. Retailing is a pretty brutal business.

I'm sure Tesco's boss Philip Clarke is not going to be on TV or on the newspapers for this one.

15 comments:

Niraj Dhupia said...

Retail is always a mystery, one can never figure out what will work and what will not.

I guess in a way it is good for Tesco to exit US markets to concentrate on issues at home. They have not been performing great here and have issued profit warnings (which was unthinkable in the past).

Personally, I find them a rip off with inferior quality and would take Asda (for bargain) or Waitrose (for quality) on any given day of the week :)

Ramesh said...

@Niraj - Yes, its all part of the cycle. For a number of years Tesco could do no wrong while Sainsbury slipped down. Now Tesco is having some bad quarters.

I can understand Waitrose, but Asda ??????!!!!!!!!

Shachi said...

Oh we have one here in town. The quality sucks. Some of their produce is pre-packaged so people like me are not going to buy it. They also carry limited items, like organic stuff, and have smaller stores. People don't have time to stop at multiple stores to complete their grocery list. The only reason I occasionally go is because they send coupons for $5 or $10 in the mail (free money) and they are located right next to a great park where we take the kids, so I grab some bananas, a loaf of organic bread and some nuts.

Ramesh said...

@Shachi - Yes, I believe Fresh & Easy was considered too small by American standards although by the standards of most other countries, it would have been considered perfectly acceptable !! I've never been into one, but apparently they all suffered from the same issues your describe.

Sriram Khé said...

It is an interesting larger issue, right, as to why retailers are not able to get into foreign markets, though the business logic might suggest that the big guys (no sexism implied!) would have figured out how to sell the products that customers are looking for?
Maybe if I had a few beer I will be able to figure that one out ;)

BTW, whatever happened to WalMart going to India? Any updates from the old country?

Deepa said...

Not a clue about retail and I m not even an avid grocery shopper. But it did remind me of my dads scooter that we wanted to abandon on the streets with a 500 rs note on it so that someone took it. In hindsight that would have worked! :D

Ramesh said...

@Deepa - Now, that would have been a novel sales experiment. While such a concept has been mentioned in virtually every household, I am unaware of anyone actually trying it !!

Ramesh said...

@sriram - Oh Walmart, and for that matter, every other major retailer, is unlikely to do anything big on India in the near future. While they have been allowed in", Ramamritham has tied them up with so any conditions that no sane businessman will invest. We have to wait for Ramamritham to go , and as we know, that is like Waiting for Godot.

Anonymous said...

Lessons of hubris not learned?

Tesco's "reasons for Fresh & Easy's failure:

1. The American recession- Kroger, Aldi and others prosper…..

2. Americans didn't understand fresh food to go? So, the customer is obligated to understand the retailer?

Interesting……...

Ramesh said...

@Anon - Very likely.

Reflections said...

Interesting read Ramesh, thanks for sharing:-).

Ramesh said...

@Reflections - Thank you

Prats said...

Isn't it exciting and imagine if Ron Burkle is able to turn this around.

Retailing is a lot about localized customer behavior and localize on that. It involves a deep level of customer and local insight which is why large retailers are not able to cross these barriers. As a matter of fact retailer in most part of world doesn't address an existing problem. People want goods which are available there are existing retailers selling them the only two ways one can compete either being cost effective and second being local and associating with the consumer and it is ironical that large organizations run after the first while the second is more effective and profitable.

Shachi said...

BTW, the local Fresh n Easy is closing tomorrow. A friend happened to call me on Monday about their store closing sale and I lucked out - got SO much stuff (mostly non perishable items, and if it was food, ALL organic) for less than half the price. Folsom sure did not work out for them!

Ramesh said...

@Prats - Yes indeed - but unlike say Food, shopping habits are not so widely different around the world and clearly economy of scale works in retail. Price is still the prime driver , in mass commodities like grocery. That's the premise on which WalMart sells in the US and it is unclear to me why say Tesco with a similar approach can't win .

@Shachi - Oh you lucked out. Clearly the Brits can never figure out the Folsomites :):)

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