TEXT-Fitch release on Tesco Plc

(The following statement was released by the rating agency)

May 16 - Fitch Ratings has lowered its ratings of UK-based food retailer Tesco PLC's (TSCO.L: Quote, Profile, Research) (Tesco) Long-term Issuer Default Rating (IDR) to 'A' from 'A+'.

At the same time, Fitch has affirmed Tesco's Short-term IDR at 'F1'.

Tesco had GBP8.1bn of gross debt outstanding as of FYE08 (23 February 2008).

The downgrade follows Tesco's announcement that it will acquire 36 Homever stores in South Korea from the E-Land group for a total consideration of GBP958m.

Although the acquisition is deemed strategic and will further strengthen Tesco's position in its most profitable international market, the acquisition will result in higher financial leverage and dilute profits in the early years. In addition, there are execution risks associated with integrating these stores into Tesco's Homeplus format and bringing them to an appropriate level of profitability, which will likely take several years.

This acquisition comes at a time when Tesco has been aggressively pursuing organic growth initiatives and increasing its share repurchase activity. Capital expenditure rose from GBP3.0bn in FY07 to GBP3.6bn in FY08, and Tesco expects capital expenditure to rise further in FY09 to GBP4.2bn, driven by its UK and international expansion.

Higher capital expenditure and operating lease commitments together with the share repurchase program, pushed financial leverage to around 2.3x at FYE08 from 2.0 at FYE07. Financial leverage will increase further in FY09 as a result of the acquisition of the Homever stores, but should moderate in FY10.

The ratings continue to reflect Tesco's strong operating performance and market-leading position as the UK's largest food retailer with a market share almost equal to the combined share of its next two competitors - J Sainsbury plc (rated 'BBB'/'F3'/Outlook Stable) and Wal Mart Stores Inc's (rated 'AA'/'F1+' /Outlook Stable) ASDA.