* First major divestment by Tesco CEO Dave Lewis
* Deal cuts Tesco indebtedness by 4.2 bln stg
* Allays fears of Tesco rights issue
(Adds detail, analyst comment, updates shares)
By James Davey and Joyce Lee
LONDON/SEOUL, Sept 7 (Reuters) - Tesco TSCO.L is selling
its South Korean arm to a group led by private equity firm MBK
Partners for $6.1 billion, it said on Monday, as the British
supermarket retreats from foreign markets to focus on reviving
its troubled domestic business.
The sale of Homeplus, its largest overseas asset, represents
the first large divestment by Tesco boss Dave Lewis, who wants
to slash debt and rid the firm of its junk credit rating after
its profits were battered by market share losses to discounters
Aldi and Lidl in Britain and by an accounting scandal.
It follows Tesco's costly exits from Japan and the United
States, as well as a reduction of its exposure to China, under
previous management and highlights the difficulty Western
retailers have had away from their home markets.
Tesco has agreed to sell Homeplus to investors led by MBK
and including the Canada Pension Plan Investment Board, Public
Sector Pension Investment Board and Temasek Holdings TEM.UL .
"This sale realises material value for shareholders and
allows us to make significant progress on our strategic priority
of protecting and strengthening our balance sheet," said Lewis,
a former Unilever ULVR.L executive who was hired last
September to lead Tesco's turnaround.
Under the terms of the largest-ever private equity
transaction in Asia, Tesco will receive 4 billion pounds ($6.1
billion) in cash. After adjustments for tax and transaction
costs, the net cash proceeds, to be received in a combination of
U.S. dollars and Korean won, will be around 3.35 billion pounds.
Tesco said the Homeplus disposal would reduce its total
indebtedness, which stood at 21.7 billion pounds as of
end-February 2015, by 4.225 billion pounds.
However, the deal will remove a business that contributed
around 150 million pounds to annual earnings.
"(The) price looks OK," said one major Tesco shareholder.
"I suspect that despite the earnings dilution the market
will take a positive view of the deal as it strengthens the
balance sheet."
INVESTMENT GRADE
Shares in Tesco, down 19 percent over the last year, slipped
0.3 percent by 0951 GMT after an initial rise of up to 2
percent.
Tesco will use the proceeds to redeem upcoming bond and
commercial paper maturities over the next 18 months. It will
also consider the purchase of some UK leasehold stores.
The sale comes after the 96-year-old group announced in
April one of the biggest losses in British corporate history,
hit by a 7 billion pounds write-down. ID:nL5N0XJ0U1
Bernstein analyst Bruno Monteyne, a former senior Tesco
supply chain executive, said the deal should allay fears the
firm will need to ask shareholders for cash to secure its
balance sheet.
He said it would only have a small impact on the net debt to
core earnings ratio, moving it from 6.2 times to 6.0 times for
the 2015-16 financial year.
But he said it would enable Tesco to get below the 4.5 times
ratio needed by ratings agency Moody's for an investment grade
credit rating in 2017-18.
Completion of the disposal, which requires the approval of
Tesco shareholders and regulators, is expected during the fourth
quarter of 2015.
Lewis will now turn his attention to the sale of Tesco's
customer data business Dunnhumby, which he put on the block in
January.
Reuters had previously reported that MBK was the preferred
bidder for Homeplus, which has 140 hypermarkets, 375
supermarkets and 327 convenience stores.
The MBK consortium said it planned to invest 1 trillion
Korean won ($831 million) in Homeplus over the next two years to
boost its competitiveness.
HSBC Bank HSBA.L acted as Tesco's lead financial adviser
and Barclays (LONDON:BARC) Bank as financial adviser and sponsor. Deutsche
DBKGn.DE and CitiGroup C.N advised MBK.
($1 = 0.6586 pounds)
($1 = 1,202.9900 won)