Tesco throws down the gauntlet with £810m fundraising

Expansion War Chest: Supermarket giant announces a bumper Christmas and unveils plans to finance a renewed assault on its rivals
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The Independent Online

Tesco, which already takes one in every eight pounds spent on the UK high street, yesterday stepped up its assault on its rivals by unveiling surprise plans for a £1.6bn war chest to fund aggressive expansion plans.

The supermarket giant softened up the City with confirmation of a bumper Christmas before tapping the market for £810m. It plans to double this sum by raising money on the back of its property portfolio and managing its working capital better.

Sir Terry Leahy, the chief executive, said: "The business is growing at a cracking pace and we want to be well financed to exploit this." He said the fundraising signalled the potential to grow even in the UK, where it already has 27 per cent of the food retail market.

The group raised £773m net of expenses from yesterday's share placing, which was at a discount of some 4 per cent to its Monday night closing price. About 90 per cent of its major investors bought new shares, suggesting shareholders will snap up the over-allotment option of another 45 million shares.

Tesco rubbed salt into the smarting wounds at J Sainsbury's by trumping market expectations with a 7.5 per cent leap in like-for-like sales over the Christmas period - a performance bettered only by Wm Morrison's 10.2 per cent rise. This increased the group's run of accelerating gains to 16 months in a row. Total UK sales for the seven weeks to 3 January were up 15.4 per cent, while sales from its international division rose 22 per cent.

Analysts said the numbers proved Tesco was taking market share from all across the high street - not just its food retailing rivals. "They are eating everyone's lunch," one said.

Sir Terry singled out the group's home entertainment arm, which saw sales increase by 30 per cent, for particular praise, adding that DVD sales grew by almost 50 per cent. "We have a number of stores that take £1m per week just in non-food," he added.

High street stalwarts, from WH Smith to Boots, have paid the price for Tesco's success in expanding its non-food lines. Brown & Jackson, Poundstretcher's owner, was among those retailers complaining that the supermarket's aggressive discounting had obliterated their festive sales. With Sir Terry intent on creating a "one-stop shop for all customer needs", the high street's pain is set to continue, analysts warned.

In the first instance, Tesco plans to use the money raised to slash its estimated £5.2bn debt. But its real aim is to expand its "one-stop" Tesco Extra stores and open more of its Express convenience stores. It also now has enough firepower to buy all 23 Safeway stores the Competition Commission gave it permission to acquire.

Dismissing suggestions that the regulators would take a dim view of Tesco controlling an even bigger proportion of its customers' wallets, Sir Terry said the group's 5 per cent share of the non-food market and 6 per cent share of the convenience store market were "all well below the kinds of shares we're used to in our core business".

"We have uncovered the prospect for very substantial businesses indeed, not just nice little add-ons," he said, referring to the group's non-food, personal finance and telephony operations.

Sir Terry said a big acquisition was not on the cards, denting speculation that Tesco might buy Matalan to hasten its expansion into non-food.