Grasping Hand

A Tesco store at Kingston Park, Newcastle upon Tyne, England.
A Tesco store at Kingston Park, Newcastle upon Tyne, England.

 

Homeplus may have to pay 1.3 trillion won (US$1.1 billion) in dividends to Tesco of the U.K. before it is sold off. So, controversy is brewing over whether or not Tesco will take money and run like Lone Star, a U.S. private equity fund that took huge dividends and a hefty profit from selling off KEB.

According to related industry sources, Tesco is pondering two options. One is to divide the stores into smaller pieces and sell groups of stores off individually, and the other is to sell off the entire chain and receive the 1.3 trillion won in dividends. The advantage of selling off chunks of stores is that the prices will be lower, but there will be big differences between the prices of high-performing and non-performing stores.  In addition, selling stores individually will clash with the Homeplus Labor Union, which has vowed to go on a general strike if the company is broken down into salable chunks.   

Therefore, analysts guess that Tesco will take the dividends and lower the price of the retail store chain by that amount for the three private equity funds that took part in the main bidding process -- MBK Partners, the Carlyle Group, and Affinity Equity Partners. 

It has also been said that the three funds wrote Tesco a little more than 7 trillion won (US$6 billion) as their bidding price. But it is also known that Tesco suggested that the three rewrite their prices, since a recent foreign exchange fluctuations devalued their bid. In fact, in April, one pound equaled 1,600 won. But this week, the figure rose to upwards of 1,880 won.  In Korea, many experts estimated the price of Homeplus to be 4 to 5 trillion won (US$3.4 to $4.2 billion). Therefore, it is unlikely that the price adjustment will raise the prices, so it is analyzed that Tesco changed its mind to easily take dividends and cut down on the price.

If Homeplus is sold off excluding the dividends, the price can fall to below 6 trillion won (US$5.1 billion).  Last fiscal year, Homeplus posted 1.568 trillion won (US$1.334 billion) in retained earnings. Therefore, massive dividends for Tesco are lawful. But, it has been revealed that Homeplus’s actual cash and cash equivalents are below 30 billion won (US$25.5 million). So, it is feared that if massive dividends are required by Tesco, Homeplus will have a weakened financial structure.

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