Tesco told: ‘Raise £5bn to get back on track’

By Nicholas Robinson contact

- Last updated on GMT

Big four expected to lose 4% market share a year until 2020
Big four expected to lose 4% market share a year until 2020

Related tags: Market share, Wal-mart, Asda, Sainsbury's

Tesco will have to raise more than £5bn to shed its “junk debt” and get its credit rating back on track, according to the ratings agency Moody’s.

The retailer would have to raise the money in order to recover its investment grade credit rating, claimed Moody’s vice president and senior analyst Sven Reinke, who also ranked Tesco’s debts of £22bn as “junk”​.

“It ​[Tesco] has a relatively high level of debt – also of adjusted debt, such as the pension deficit and operating leases,” ​he said.

“It is a relatively high-leveraged company. That ​[heavy debts] was acceptable for an investment grade company until now because they had decent profit margins.”

Britain’s biggest retailer is expected to raise most of the £5bn it needs by selling its South Korean business, which is thought to be worth £4bn, said Reinke.

Further £1bn would be raised

Moody's predicts:

  • Tesco will need to raise £5bn to shed "junk debt"
  • Aldi and Lidl will grow their market share by 1% each year
  • The big four will lose 4% of their market share each year

A further £1bn would be raised through the sale of its stake in the data business Dunhumby, he added.

Tesco, which posted its highest pre-tax loss of £6.4bn earlier this year​, will continue to lose more market share to the heavy discounters Aldi and Lidl, claimed Reinke.

The big four supermarkets – Tesco, Asda, Sainsbury and Morrisons – would lose 4% of their market share to the discounters in the years to 2020, he added.

“We expect Aldi’s and Lidl’s combined share of the UK market to reach 12% – 15% by 2020,”​ Reinke said.

“Although the discounters’ sales densities have caught up with the big four retailers, Aldi and Lidl could continue to gain around 1% market share every year supported by their store expansion plans at a time where the big four selectively close unprofitable stores in order to save costs.”

Grow market share by 1%

However, Aldi’s and Lidl’s “free meal” ​was coming to an end, other UK analysts had recently claimed.

The discounters’ growth would slow​ as the UK economy continued to improve and the pair had to stock more lines to attract and maintain customers, according to Shore Capital director and head of research Clive Black earlier this month.

Meanwhile, Tesco admitted to a “number of probable breaches” ​to the Groceries Supply Code of Practice in its annual results, leaving the retailer open to possible action from the Groceries Code Adjudicator Christine Tacon.

In the small print of its annual report, Tesco said: “Regrettably, we have concluded that there have been a number of breaches to the Code which fall short of the high standards we expect to uphold in our dealings with our suppliers.”

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