Tesco could find salvation in Thailand. The embattled British supermarket is eyeing ways to raise cash through asset sales. Its business in Asia is healthy and has potential to grow. If Tesco wants to offer investors a growth story as well as a turnaround tale it needs to retain control of its international operations. Listing a minority stake in its Thai unit could shore up the group's balance sheet.
After folding its business in China into a joint venture and exiting Japan, Tesco still owns supermarkets in South Korea, Malaysia and Thailand. These produce around one fifth of the group's adjusted operating profit and are more profitable than its businesses in the United Kingdom and Europe. Tesco's Thai supermarkets bring in just 70 per cent of the revenue of its South Korean operations but have expanded at a compound annual rate of 11.1 per cent over the past three years - five times South Korea's growth in local currency terms, says Bernstein.
Tesco Thailand has two big listed peers: CP ALL, backed by Thai tycoon Dhanin Chearavanont and number three player Big C Supercenter. The two trade at an average of 1.31 times expected 2016 sales and 18.4 times operating profit. Using those multiples with Nomura's forecasts for Tesco Thailand suggests a valuation between £4.6 billion and £5.1 billion. Take the mid-point, apply a 10 per cent discount for the Initial Public Offering (IPO), and Tesco could raise £2 billion by selling a 46 per cent stake.
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Tesco may explore alternative options in Asia. Dhanin has expressed an interest in the Thai business, though a recent acquisition spree by the tycoon may make it hard for him to make a knockout bid. The British supermarket also has other ways to raise cash closer to home. But if Tesco looks east to solve its problems, a Thai IPO looks the most promising opportunity.
