Buffett puts Tesco shares in his trolley
Wednesday 17 May 2006
The legendary American investor Warren Buffett has placed a $329m (£174m) bet on Tesco shares, in a sign that he sees significant future value in the UK's largest supermarket chain.
The stake, which was acquired in March, accounts for less than 1 per cent of Tesco's shares, but will be seized upon by fans of the company who say that it has been persistently undervalued by the UK stock market.
Mr Buffett bought 57.6 million Tesco shares through Geico, an insurance subsidiary of his Berkshire Hathaway conglomerate, it was revealed in a regulatory filing yesterday.
The investment was made before Tesco said it would unlock up to £5bn from the value of its £24bn-plus property estate over the next five years and return cash to shareholders.
Tesco announced that plan alongside its annual results last month, when the company reported a pre-tax profit of £2.25bn, up 17 per cent on the previous year. Sales had grown 13 per cent to £41.8bn thanks to its push into non-food retailing and into new territories overseas. The company showed the muscle it has when negotiating with suppliers, holding its operating margin flat despite cutting prices in stores by 2 per cent and absorbing £100m of extra costs, an increase of 60 per cent.
Such progress has counted for little with UK investors, who have become nervous that Tesco will squander the profits it makes at home with ill-starred ventures overseas. Last year, £9.2bn of the group's £41.8bn sales came from outside the UK. And earlier this year, the company revealed it had plans to crack the US market, starting with the opening of convenience stores in California.
Tesco shares have missed out on the stock market recovery, staying flat over the past 18 months. The stock has lost 6 per cent of its value since Mr Buffett bought in, after Tesco's sales growth fell to its lowest rate for four years and rival Sainsbury's began to claw back market share in the UK.
A new analysis yesterday by the retail sector analysts at Panmure Gordon suggested that investors are now putting a higher value on Sainsbury's future profits than on Tesco's, even though Sainsbury's is yet to prove it can fully recover from its recent poor performance.
An investment by Mr Buffett - nicknamed the Sage of Omaha - will therefore be seen as an important badge of honour for the company. He is famed for his homespun investment philosophy, shunning technology stocks and stakes in sectors which he does not understand.
His preference is for household name brands with long histories and solid performance records, and he has built up a portfolio which includes McDonald's, Coca-Cola, American Express and Procter & Gamble, the consumer products giant which makes Gillette razors and Pampers nappies. Intriguingly, Berkshire Hathaway also holds a stake worth almost $1bn in Wal-Mart, the owner of Asda in the UK.
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