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Fitch: Tesco, Dixons Deals Underline Shift to Core Market Focus
September 11, 2013 / 2:42 PM / 4 years ago

Fitch: Tesco, Dixons Deals Underline Shift to Core Market Focus

(The following statement was released by the rating agency) LONDON, September 11 (Fitch) Tesco's deal to offload its US operations and a similar recent sale by Dixons Retail are part of a broader trend among European retailers to increase their focus on core operations, Fitch Ratings says. These deals are positive for the credit profile of both Tesco and Dixons, as they reduce the uncertainty over financial results while allowing the companies to focus financial and management resources on the most important parts of their business. For Tesco, the GBP150m cash outflow from the disposal of its US Fresh & Easy division is cheaper than either shutting the unit down or enduring several more years of operating losses. However, it does leave the group's Asian and European operations as the only source of international diversification. For a relatively small part of the business, Fresh & Easy had taken up a significant amount of capital and management time. The sale therefore removes distractions from what we see as the group's biggest challenge - the continuing drop in like-for-like sales, market share and margin at its core UK business. We downgraded Tesco's Long-Term IDR to 'BBB+' from 'A-' in April to reflect these challenges and the resulting drop in profits. While the US sale will allow the company to devote more time to these issues, we do not believe Tesco can reverse the rise of competitors such as Sainsbury, given the structural changes in the UK market and the weak economic environment. In addition, Tesco's European and Asian operations, which historically enjoyed robust growth, are facing increasing macroeconomic and regulatory challenges as well as pricing pressures. Tesco has pulled out of the Japanese market and is also in talks with China Resources Enterprise about forming a joint venture in China that would significantly cut Tesco's exposure to the country. This further underlines the company's shift in focus on to its core UK market. Dixons' announcement of the disposal of loss-making online unit PIXmania and Electroworld operations in Turkey resulted in us placing the group's long-term IDR of 'B' on Rating Watch Positive. Completion of the disposal has the potential to result in a one-notch upgrade as it means the credit profile will be driven predominantly by the core UK and Nordic operations. Other Fitch-rated European retailers do not have such troubled assets that they would be willing to offload at a loss, but some are taking a similar approach of increasing their focus on core markets. Carrefour, for example, has been selling international operations that are successful, but where it doesn't have a chance of becoming the market leader, such as its supermarket chains in Colombia, Malaysia and Thailand. Other international markets, such as Brazil, are however considered part of the core business. Contact: Ching Mei Chia Director Corporates +44 20 3530 1068 Fitch Ratings Limited 30 North Colonnade London E14 5GN Jean-Pierre Husband Director Corporates +44 20 3530 1155 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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