* Aeon to pay nominal sum for 50 pct stake
* Tesco to invest 40 mln stg before cutting exposure
* Tesco put Japan business up for sale in August
* Aeon looking to expand to drive domestic growth
* Tesco shares up 0.5 pct, Aeon shares close up 0.6 pct
By Ritsuko Shimizu and James Davey
TOKYO/LONDON June 18 Tesco, the world's
No.3 retailer, has ended a nine-year attempt to crack Japan's
tough retail market by effectively paying Aeon Corp,
the country's No.2 general retailer, to take its loss-making
business there off its hands.
The deal, which will allow Tesco to focus on fixing its main
British business after a shock profit warning in January, will
inevitably re-heat speculation over the group's long-term
commitment to its much larger loss-making Fresh & Easy business
in the United States.
Many foreign retailers have struggled in Japan, hampered by
fickle consumer tastes, a super-competitive landscape and
prolonged, profit-sapping deflation. France's Carrefour
and Britain's Boots are among the firms to
have pulled out over the past decade.
The move is also the latest in a series by store groups
exiting weaker markets as they struggle with sluggish demand in
many developed economies. Carrefour announced a deal on Friday
to pull out of Greece.
Tesco, which trails Carrefour and U.S. industry leader
Wal-Mart by annual sales, put the Japanese business up
for sale last August, hiring Goldman Sachs to find a
Japan is the smallest of Tesco's 13 international
businesses, consisting of 117 stores in greater Tokyo.
TWO STAGE EXIT
The deal with Aeon, first reported by Reuters, will see
Tesco exit Japan in two stages.
In the first phase, it will sell 50 percent of its shares in
Tesco Japan to Aeon for a nominal sum. This will result in the
formation of a joint venture with Aeon.
Tesco will then invest 40 million pounds ($63 million) as a
joint venture partner to finance restructuring, after which it
will have no further financial exposure to the Japanese
"Given ongoing trading losses of about 30 million pounds
after approaching a decade in the market, Tesco appears to our
minds to have taken the correct approach with funded
withdrawal," said Shore Capital analyst Clive Black.
He said it showed chief executive Philip Clarke is bringing
greater focus and capital discipline to Tesco.
The deal will help Aeon, which trails Japan general retailer
Seven & I Holdings in terms of market value, expand its
reach in its home market as it tries to drive growth.
Prior to the Tesco purchase, Aeon had spent more than $775
million over the last five years, according to Thomson Reuters
data, including taking stakes in Japanese supermarket chains
Maruetsu and Marunaka.
Tesco's shares were up 0.5 percent at 302.65 pence at 1025
GMT, slightly outperforming the STOXX Europe 600 retail index
. Aeon shares closed up 0.63 pence at 961 yen before the
FOCUS ON UK TURNAROUND
After a surprise profit warning in January, Tesco is
focusing on turning around its British business, which accounts
for over 70 percent of its trading profit. Last week the firm
posted a drop in underlying first-quarter British sales as its
recovery plan struggles to gain traction.
In April, Clarke rejected shareholder calls to pull the plug
on Fresh & Easy but said he did not expect the chain to break
even until its 2013/14 year, compared with the end of 2012/13
Last week Tesco reported underlying sales growth at Fresh &
Easy slowed to 3.6 percent in its first quarter from 12.3
percent in the fourth quarter, prompting renewed calls for
management to reassess its strategy for the U.S. business.