Tesco PLC’s Shake-Up Reveals Hidden Plans

Tesco PLC (LON: TSCO) is not an easy call, but the shares could comfortably trade above 200p if Tesco shrinks further, argues Alessandro Pasetti.

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Dave Lewis is serious about turning around Tesco (LSE:TSCO). The latest management shake-up, which was announced Tuesday, proves that. What does it also mean?

First, divestments of international assets will likely speed up. Second, Tesco Bank may become a more strategic asset for the group. 

International Operations

Noboby is in charge of Tesco’s international operations, which reinforces the view that large disposals are very likely in 2015. They are crucial to support Tesco’s stock price, in my view.

As you may well know, Tesco miserly failed in the US and Japan. There, its operations were simply too small to become economically viable, and didn’t grow quickly enough to justify an appropriate return on investment. The timing of the investment was pretty bad, too. Investors have talked for years about the huge potential offered by emerging markets.

But take China, for instance, where the retail market is highly fragmented. Tesco has swapped international assets with rivals over the years: the same won’t happen in China, given that strategic joint ventures with domestic partners are the only way to enter the market. 

“China Resources Enterprise reported a loss in the third quarter as it incurred costs from merging its store network with Tesco Plc’s chain in China and the country’s austerity measures hurt retail sales,” Bloomberg reported in mid-November.

More broadly, the problem with Asian assets, which account for less than one fifth of the group’s revenue, is that they will unlikely fetch a top valuation, in my opinion. Yet the “New Tesco” doesn’t need them, so it’d be a good idea to get rid of them sooner rather than later.

Tesco Bank

Along with his duties at Tesco Bank, Benny Higgins will also oversee the group’s strategy, it was announced on Tuesday. A partial float of Tesco Bank may become more likely, although I think an IPO of Tesco’s banking unit has never been a high priority for Mr Higgins.

Mr Higgins is a banker, who was rumored to be among the runners to replace Stephen Hester at Royal Bank of Scotland last year. He will likely take a cautious approach to the group’s strategy, but at the same time Tesco Bank may try to compete more aggressively with other retail banks. We’ll see how that one goes.

Other changes to the executive committee have been made. If Dave Lewis is quick to find a solution for Tesco’s international assets, while focusing on the UK operations, for which he’ll be in charge on a temporary basis, Tesco stock could comfortably trade above 200p for most of 2015. Response from investors has not been not overwhelming, however, and the shares of Morrisons and Sainsbury’s have performed much better than those of Tesco in the last couple of days. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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