Tesco is talks to take over Hong Kong's leading supermarket chain ParknShop with its Chinese partner, China Resources Enterprise (CRE).
Hutchison Whampoa, the Hong Kong conglomerate headed by the billionaire Li Ka-shing, is seeking $3bn-$4bn (£1.9bn-£2.5bn) for the ParknShop chain. The talks comes after the UK grocer earlier this month unveiled a "memorandum of understanding" to merge its Chinese business with the state-backed retailer CRE, which could see the Tesco brand disappear from its 131 stores on the mainland.
The Chinese retail and beer conglomerate said it had already spoken with Tesco about bidding for ParknShop, a deal which would make it the biggest supermarket chain in the former British colony.
Frank Lai, the finance director at CRE, said yesterday: "We will consider to bid with Tesco; it's one of the discussions we have with them."
He added the acquisition could help CRE "increase market share, improve efficiency and achieve economy of scale" in Hong Kong but it could face competition rivals.
ParknShop is understood to have received bids from eight operators, including the world's biggest retailer Walmart, Lotte and Aeon.
ParknShop is the second-largest player in Hong Kong's $6.6bn (£4.2bn) grocery sector with a 33 per cent share, behind the market leader Wellcome with 40 per cent.
Mr Lai added that ParknShop was a "quality asset" but declined to say how much he thought it might be worth.
Tesco's attempt to merge with CRE, which has 2,986 Vanguard stores in China, was an admission that it would be better to find a partner than go it alone in China.
The combined retail group would have revenue of £10bn, although it may take months for the deal to complete. The British grocer said the potential deal was consistent with a more "disciplined approach to the allocation of capital".
Under the proposed joint venture, Tesco is expected to have a stake of 20 per cent, while CRE would have 80 per cent.
Although Tesco will provide CRE with logistics and supply-chain expertise under the proposed deal, it will have to pay hundreds of millions of pounds to join forces with its much-bigger Chinese rival.
Tesco launched in China in 2004 via a joint venture with a local chain, Hymall, and then acquired a further 40 per cent of the venture two years later.
However, its underlying sales fell by 1.1 per cent in the country last year and Tesco said in April that it had "adopted a more cautious stance in China".
It has been pulling back on its expansion there since it unveiled plans in 2010 to build 80 large shopping malls, anchored by a Tesco, over a five year period.
On home soil, Tesco is investing heavily to turn around its lacklustre performance in the UK.
Its domestic like-for-like sales fell by 1 per cent in the 13 weeks leading to May 25, partly driven by falling demand for consumer electronics, such as big televisions.
Checking out of foreign ventures
Tesco made its first foray outside the UK and Republic of Ireland in 1995, when Britain's biggest supermarket entered Hungary by acquiring the local retailer S-Market's 26 stores.
Under its former chief executive, Sir Terry Leahy, Tesco went on a land-grab offensive from the late 1990s that eventually saw it open in 13 countries outside the UK to give it eye-watering revenue of £72.4bn last year. But in recent years, Tesco has retreated from key markets with its tail between its legs.
The supermarket, which is led by Philip Clarke, decided to exit Japan in 2011 and this year said that it was throwing in the towel on its failed US venture, Fresh & Easy.
Following a £1bn writedown on Fresh & Easy's assets, the group also said it was seeking the safe arms of a bigger rival in China this month.