Acquisition

RNS Number : 0304A

Tesco PLC

28 July 2008

 



TESCO PLC

TESCO TAKES FULL OWNERSHIP OF TESCO PERSONAL FINANCE AND TARGETS £1 BILLION FROM RETAILING SERVICES

Tesco PLC ('Tesco') today announces that it has reached an agreement with The Royal Bank of Scotland plc ('RBS') to buy from RBS its 50% shareholding in Tesco Personal Finance Group Limited ('TPF') for a cash consideration of £950 million (the 'Acquisition').

The Acquisition will enable Tesco over time to extend its financial services business from a collection of popular financial products to that of a full service retail bank offering more choice, innovation and value to customers, and better returns to shareholders.

The Acquisition is part of the strategy by Tesco, Britain's largest retailer, to grow its share in fast growing services markets including financial services, telecoms and internet/home shopping.

Tesco believes such services could deliver £1 billion in profits per annum - more than double current levels of just under £400m.

Tesco CEO Sir Terry Leahy, commented: 

'Services are bigger and faster-growing markets than food. As consumers look to make every pound work harder, it is a good time for Tesco to expand its presence. 

'Tesco's clear strategy, set out a little over 10 years ago, has created new service businesses attracting around seven million customers. We have become a trusted supplier of innovative products and services offering great value and I believe Tesco's special relationship with consumers will enable TPF, as a wholly owned subsidiary of Tesco, to move its business to the next level.

'With a renewed focus on growth in the UK and internationally we can unlock the true potential of Tesco's retailing services.'

Tesco has exciting plans for the future development of TPF, which will include an increased presence in Tesco's traditional stores, a wider range of savings products and, possibly in the future, a current account product. 

In addition, TPF will continue to receive services from RBS under various Commercial Services Agreements. 

Tesco's Finance and Strategy Director, Andrew Higginson, will assume a new Tesco Board position as Chief Executive of Retailing Services. Higginson will lead a strengthened services team including a new CEO and Finance director for TPF and a new CEO for Tesco Telecoms. He will retain his responsibilities for Tesco Group strategy but will relinquish his role as Finance Director of Tesco once a suitable successor has been put in place.

Tesco is delighted to have recruited Benny Higgins, a leading figure in the banking industry, to run the new wholly-owned TPF business. Higgins brings huge experience having run the retail banking divisions of both RBS and HBOS. Iain Clink, a former TPF CEO and until recently Head of Cards and Direct Finance at RBS, will join TPF as Finance Director.

Tesco Telecoms will be led by a new CEO, Lance Batchelor, who joined Tesco a year ago as UK Marketing Director. Batchelor was previously UK Marketing and Commercial Director at Vodafone for four years.

Tesco.com CEO Laura Wade-Gery will continue to run the world's biggest on-line grocery store and the successful Tesco Direct non-food business. 

FURTHER INFORMATION ON THE ACQUISITION OF RBS's INTEREST IN TPF

The approval of the Financial Services Authority (FSA) is a condition of the Acquisition and initial discussions have taken place. The Acquisition is expected to close in the final quarter of calendar 2008.

Rationale for the Acquisition:

The TPF joint venture structure was an ideal way for Tesco to enter the financial services market 11 years ago. RBS has been a good partner and Tesco has learned a lot from them about how to manage a financial services business. 

However, TPF has now reached a size where only sole ownership can unlock the potential growth Tesco wants to see from the TPF business in the future.

Discussions on how to achieve this began last year and Tesco concluded that it was important for TPF to grow as part of the Tesco Group.

UK retail financial services are diverse, fast growing and attractive markets. Today, TPF serves only a proportion of these markets, with its presence in insurance, credit cards, personal lending and most recently on-line insurance comparison through Tesco Compare. Customers are becoming more demanding and they are increasingly prepared to switch provider to get the products and service levels that they want. As a result, Tesco believes that retail financial services remain a significant growth opportunity which TPF can better address as a wholly-owned subsidiary of Tesco.

The UK financial services profit pool (1) is estimated to be worth at least £20bn per annum and TPF's current product offer has material market positions in only two of these core categories (car insurance (4.3%) and credit cards (6.9%)). While TPF's current offer addresses other areas, it currently has less meaningful market positions (e.g. home insurance (2.0%) and savings (0.8%)) and there is a considerable opportunity for our innovative and customer focused offer both to build share in existing categories and to enter new segments successfully. 

Tesco believes that its proven ability to innovate and focus on delivering better value to customers will attract a greater share of consumer spending on retail financial services and deliver strong returns for shareholders.

The deal both creates value for shareholders and will be earnings accretive from the year of acquisition.

(1)  UK financial profit pool defined as UK profits before tax derived from operations in retail provision of general insurance, mortgages, personal loans and credit cards, current accounts, savings, SME banking and payment protection insurance.

Background on TPF:

TPF was founded in 1997 as a joint venture between Tesco and RBS to market a range of financial services products under the Tesco brand through Tesco's store network. From the outset, TPF has appealed to customers by offering them access to good value, straightforward ranges of uncomplicated financial services products in a convenient and familiar selling environment. TPF has grown rapidly over the last 10 years with profit before tax reaching £206 million last year. TPF's profits for the current year are expected to be over £240 million.

Today TPF's principal activities are: 

• general insurance - motor, home, pet and travel;

• credit cards and personal loans;

• personal saving products;

• on-line insurance comparison (Tesco Compare); and

• a network of cash machines (ATMs)

Tesco sells its products through multiple channels including in-store (e.g. through promotional materials), by telephone and online. Approximately 60% of new sales of TPF's financial products come through the online channel - a further benefit of grouping it more closely with Tesco.com.

While the bulk of TPF's activities are focused on the UK, it also offers a selection of financial services products (including credit cards and insurance products) in certain other countries in which Tesco has a presence, namely Ireland, Hungary and Poland.

TPF's product range:

TPF has over 5 million customer accounts. Its key product areas are:

Insurance - In total, consumers hold approximately 2.7 million insurance policies with TPF, and insurance represented over 60% of TPF's 2007 profit before tax. TPF is one of the leading providers of motor insurance in the UK with a share of 4.3%. In addition, TPF offers breakdown recovery, home, pet, travel and other personal insurance products. TPF also operates a leading insurance comparison portal, Tesco Compare, which it launched in 2007 and has proved very popular with customers. Tesco Compare was rated 'Best car insurance comparison site to the customer' for two successive years by independent financial product research company Defaqto.

Personal banking - TPF offers a range of simple products focused around the Tesco credit card, where TPF has built a 6.9% share. TPF currently has total credit card receivables of £1.9 billion and 1.3 million active accounts. TPF has a high quality and low risk credit card book resulting from the quality of its customer base, a high proportion of who are loyal Tesco customers and, experience shows, are a lower credit risk. This is evidenced by the low level of credit card arrears, with just 0.4% of balances that are three months in arrears.

TPF also has a £1.6 billion loan book with approximately 210,000 personal loan customers. TPF's personal lending activities are relatively small and are largely funded by customer deposits (see below), with minimal reliance on wholesale funding. 

TPF has approximately 390,000 savings account customers and total savings balances of £2.7 billion.

ATMs - TPF has over 2,700 ATMs situated across the Tesco store portfolio and serves over 25 million transactions per month. TPF's ATM business produces high-quality and reliable earnings that are continuing to grow due to the high footfall resulting from their convenient locations within Tesco stores.

TPF's focus on retail banking and absence from corporate lending and mortgages mean it is not exposed to some of the difficulties currently being experienced by many banks.

Governance, management and employees:

TPF will have its own governance structure enabling it to meet fully the requirements of the Financial Services Authority. Although Tesco will stand behind TPF and its liabilities a new TPF Board will be appointed allowing TPF to act independently in the bank's best interests. The new TPF Board will consist of the following members:

• Andrew Higginson, Finance and Strategy Director and now CEO of Retailing Services at Tesco, will remain as Chairman of TPF. Higginson will step down as Tesco's Finance Director when a replacement has been confirmed;

• two Executive Directors, the newly appointed TPF CEO and Finance Director;

• at least two independent Non-executive Directors with significant experience in banking and insurance. TPF has already appointed Graham Pimlott, former Director of Group Planning, Operations and Technology at Barclays Bank plc. Pimlott, a former Tesco Non-executive Director, was also Chairman and CEO of Barclay's Asian operations and before that, the head of investment banking at BZW. Pimlott has agreed to chair TPF's audit committee; and

• other Non-Executive Directors some of who will be from within Tesco. 

Tesco recognises that TPF needs senior leaders with specialist banking and financial services management and skills. As a result, Tesco has recruited Benny Higgins to be the new CEO to lead TPF in its future evolution as a wholly owned subsidiary of Tesco. Higgins has significant industry experience including within TPF, where he was a non-executive director from 1998 until 2006. He was also Head of Retail Banking at RBS from 1997 until 2006 and worked at Halifax Bank of Scotland Group as Chief Executive of Retail Banking until August 2007. In addition, Tesco has appointed Iain Clink to serve as TPF's Finance Director. Clink joins TPF from RBS, where he was until recently Head of Cards and Direct Finance. He was CEO of TPF between 1999 and 2004. 

TPF's current CEO and Finance Director will remain in place for a transitional period and other management appointments will be made in the coming weeks.

It is anticipated that the approximately 200 dedicated TPF head office employees, including Tesco Compare, who are currently employed by RBS will transfer with the business and be employed by Tesco. TPF's head office will remain in Edinburgh. The RBS staff who perform services for TPF will continue to be employed by RBS and will continue to provide these services as set out under the Commercial Services Agreements. 

Further details of the Acquisition:

Tesco is acquiring RBS's current 50% shareholding in TPF for a cash consideration of £950 million, payable in full upon completion of the Acquisition ('Completion'). Tesco will also acquire subordinated shareholder loans held by RBS at their market value of approximately £100 million.

Tesco will fund the cash consideration for the Acquisition and the funding requirement to finance TPF's normal operations from existing debt facilities and, subject to market conditions, in the debt capital markets.

Tesco and RBS have agreed the terms of various commercial services agreements ('CSAs') covering general insurance, life insurance, ATMs, banking and Tesco Compare under which RBS will commit to continue to provide services to TPF at agreed cost and service levels for periods of between two and seven years. The services to be provided under the CSAs will include, amongst others, the operation of customer contact centres, account establishment and management, card issuance, back-office processing, and collections and recoveries.

TPF's general insurance business is currently underwritten by UK Insurance Ltd ('UKI'), a wholly-owned subsidiary of RBS Insurance Limited ('RBSI'), itself a wholly owned subsidiary of RBS. RBSI and UKI have committed to provide general insurance related services under an insurance distribution agreement to TPF for a three-year period. 

Under the terms of the general insurance distribution agreement TPF will continue to supply the approximately £260 million of capital already invested to support insurance underwriting activities in relation to the TPF insurance book, and UKI will provide a full range of services at agreed cost and service level to TPF including operation of customer contact centres, insurance quoting and policy issuance, underwriting and claims management. All profits from general insurance distribution, underwriting and investment activities will be paid to TPF.

If RBS sells its insurance business, or any part of its insurance business (including RBS or UKI),  the obligation to supply insurance services to TPF on the terms set out above will be protected.

Further financial details:

In the year to 31 December 2007, TPF had profits before tax of £206 million.

On a pro forma basis TPF's balance sheet comprised approximately £4.5 billion of assets, largely made up of loans and advances to customers, and approximately £4.0 billion of liabilities, of which £2.7 billion were customer deposits and £0.7 billion secured wholesale borrowing. The net assets of the business were approximately £560 million.

At 31 December 2007, TPF had gross assets of £8,156 million, a significant proportion of which was in the form of back-to-back intra-group loans for funding purposes between TPF and RBS. 

Upon Completion, TPF's assets and liabilities will be fully consolidated into Tesco's balance sheet. It is Tesco's intention to give additional financial disclosure in relation to TPF to aid analysis of the Tesco Group's financial position and performance. There are two main elements to this: Tesco will separately report TPF's revenue and operating profit and it will disclose the balance sheet of TPF separately from that of the retailing operations of Tesco. 

A video interview with Andrew Higginson is available to view at www.tesco.com/investorcentre.

CONTACTS:

Tesco PLC:

Investor Relations:	Media:
Steve Webb	Trevor Datson
01992 644800	01992 644645

Advisers:

Greenhill & Co.:	JPMorgan Cazenove:	Maitland:
Simon Borrows	John Muncey	Angus Maitland
David Wyles	Luke Bordewich	020 7379 5151
020 7198 7400	020 7588 2828

This announcement is for information purposes only and does not constitute an offer or an invitation to acquire or dispose of any securities or investment advice in any jurisdiction.

Greenhill & Co. International LLP, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting for Tesco and for no-one else in connection with the Acquisition or the contents of this announcement and will not be responsible to anyone other than Tesco for providing the protections afforded to clients of Greenhill & Co. International LLP, or for providing advice in relation to the Acquisition or the contents of this announcement.

JPMorgan Cazenove Limited, which is authorised and regulated in the United Kingdom by the Financial Services Authority, is acting for Tesco and for no-one else in connection with the Acquisition or the contents of this announcement and will not be responsible to anyone other than Tesco for providing the protections afforded to clients of JPMorgan Cazenove Limited, or for providing advice in relation to the Acquisition or the contents of this announcement.

It is possible that this announcement could or may contain forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could or other words of similar meaning. Reliance should not be placed on any such statements because, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, performance or events, and Tesco's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements.

There are several factors which could cause actual results to differ materially from those expressed or implied in forward-looking statements. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are delays in obtaining, or adverse conditions contained in, regulatory approvals, changes in economic conditions, competition and industry restructuring, changes in interest or tax rates, changes in energy market prices, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, currency fluctuations, technological developments, the failure to retain key management, or the availability, key timing and success of future acquisition opportunities. Each forward-looking statement speaks only as of the date of the particular statement.

Tesco undertakes no obligation to revise or update any forward-looking statement contained within this announcement, regardless of whether those statements are affected as a result of new information, future events or otherwise, save as required by the listing rules of the United Kingdom Listing Authority, the rules of the London Stock Exchange or by law.

 

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