Wednesday, July 30, 2008

Tesco PLC Acquires Royal Bank of Scotland's 50% Stake in Tesco Personal Finance; Goal is to Become A Retail Banking Leader

On May 31 we ran this report from the Sunday Times of London in which the paper's sources said Tesco PLC, parent company of Fresh & Easy Neighborhood Market USA, planned to acquire the Royal Bank of Scotland's (RBS) 50% ownership share of Tesco Personal Finance, the financial services and banking division of Tesco PLC.

Tesco PLC has now reported it's acquired RBS's 50% share of Tesco Personal Finance for ~950 million-p (British Pounds) or $1.9 billion U.S., and will be the sole owner of the financial services business.

Tesco and RBS have been joint-venture partners in Tesco Personal Finance for many years. However in recent years Tesco PLC CEO Sir Terry Leahy and his financial services division team have felt the 50-50 joint-venture with RBS was hampering Tesco's ability to create new initiatives, grow the personal financial services enterprise and better integrate the personal banking operations with Tesco's retail store operations.

With full ownership of Tesco Personal Finance, Tesco PLC wants to drive hard into retail banking and financial services, becoming a major player in checking, credit cards, loans, mortgages and the like.

The synergies with the about 1,700 Tesco branded retail stores it operates in the UK are considerable, including the ability to use its vast Tesco Club Card consumer data base as a cross marketing tool between its retail and financial services businesses.

Below are a few articles from the a selection of newspapers, business and financial publications about the acquisition by Tesco PLC of the remaining 50% of Tesco Personal Finance:

UK-The Independent: Tesco pays £950m to launch its assault on the banks

UK-The Guardian: Financial services: Tesco pays £950m to buy out RBS stake in bank

UK-This is Money: Tesco takes on banks after RBS buyout

UK-Daily Mail: Welcome to Tesco-bank: Supermarket giant to offer current accounts and mortgages.

UK-Telegraph: How do Tesco’s financial products stack up?

UK-Director of Finance Online: Supermarket rescues bank
Strange things can happen during a credit crunch but Tesco bailing out Royal Bank of Scotland probably says everything about the state of the UK economy. The supermarkets are strong; banks are weak. Click here to read the full story.

Banking Business Review: Tesco: it's in the bank

Associated Press: Tesco buys RBS out of its personal finance arm; plans full-service retail bank

As we suggested above, the synergies between a giant retailer like Tesco, which is the UK's number one retail chain and the world's third largest retailer after number two Carrefour of France and number one Wal-Mart, Inc.

In fact, in 2006-2007, U.S.-based Wal-Mart planned to create its own retail bank, which the mega-retailer planned to position as a full-service financial institution, tieing it in with its retail store network as well.

However, there was so much opposition from certain U.S. government regulatory agencies, consumer activist groups and others, that Wal-Mart eventually decided to scale down its plans to open a full-fledged financial services business and opted to create a limited financial services arm that focusing just on its customer credit card business, similar to what Target and a couple other large U.S. retail chains do.

Tesco PLC however received no such opposition in the UK in acquiring Royal Bank of Scotland's 50% stake in Tesco Personal Finance. Of course this is due in the main to the simple fact that Tesco already owned half of the business, along with it being called Tesco Personal Finance.

But there more to it than just that. In the UK it is an accepted practice for large retailers like Tesco--which operates various different format stores in the country ranging from huge hypermarts and supermarkets, to discount stores and combination small-format grocery/convenience stores. Tesco sells everything from food and groceries, to clothing, appliances, electronics and more in the UK, similar to what Wal-Mart does in the U.S. and elsewhere.

In addition to Tesco, which is the UK's number one retailer, number two Asda, which is owned by Wal-mart, and number three Sainsbury's also have personal finance divisions, along with being in the insurance business like Tesco is.

Additionally, these retail chains also are in the Internet service provider business, all operate online/home delivery grocery stores, and are diversified into other sectors along with their major focus on grocery, hard and soft goods retailing.

Neither of these two competitors--Asda or Sainsbury's--will have a personal financial business to rival Tesco though now that it has bought out the RBS 50% stake in Tesco Personal Finance.

Despite the credit crunch and financial institution crisis currently going on in the U.S. and UK, acquiring the remaining shares of Tesco Personal Finance from RBS is a wise medium and long term decision for Tesco PLC in our analysis. After all, no industry has better cash flow even in a poor economy than the supermarket industry, which is Tesco's bread and butter business.

As a UK financial analyst said yesterday in explaining Tesco's acquisition of the RBS 50% stake in Tesco Personal Finance: the supermarkets are strong and the banks are week. That might be all the reason needed for the deal.

We don't see any immediate benefits to the deal for Tesco's Fresh & Easy Neighborhood Market USA division. However, down the road we believe Tesco will better leverage its Tesco Personal Finance business with all of its international retail operations, including Fresh & Easy in the U.S., now that it is the sole owner of the banking business.

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