The Investment Column: Sighs of relief if Tesco walks away from the big one

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The Independent Online
Tesco shareholders will breathe a huge sigh of relief if, as expected, the company decides not to intervene in the pounds 2.5bn bid for Docks de France, the French supermarket group.

Tesco's shares have taken a thorough beating in the past two weeks since it emerged that Sir Ian MacLaurin was considering mounting a rescue bid for the company to save it from the clutches of the French hypermarket group, Auchan.

Tesco shares were trading at more than 300p at the beginning of this month but have since shed around 9 per cent of their value as the City became nervous that Tesco might wade in with a mega-bid and the mother- of-all rights issues to fund it. They fell another 7p in a declining market to 276p yesterday.

With Docks de France now likely to accept an enhanced offer from Auchan, Tesco has walked away from the big one even though it admits that it met Docks in France and considered making a move. It would be reasonable to now expect a bounce in Tesco shares as institutions pile back in.

The reasons for Tesco's decision and relief in the City are plain enough. It would have proved an expensive deal and saddled Tesco with high gearing for the next 18 months. Keen as the company is to expand in Europe it just couldn't make the deal make financial sense.

Another key reason is that a Tesco foray into France would have let Sainsbury off the hook at home. Tesco is winning the battle on like-for-like sales increases and has been on a marketing roll for some time with the most successful loyalty card in the sector.

With Iceland melting after a profits warning and Somerfield's float struggling to get off the ground even after a price cut, Tesco's UK position looks stronger than ever. Why risk letting that dominance slip by pouring resources into a second front?

So normal service has been resumed, then. Tesco will continue to concentrate on the UK while pushing its French business ahead through Catteau which it acquired in 1992.

Well, not quite. Tesco has made it clear that it would like to expand its European interests and France is top of the list. Its other European deals in Hungary and Poland are a mere sideshow compared with its business in France which recorded sales of pounds 550m last year and profits of pounds 10.5m.

Some kind of move is likely sooner or later and Tesco's interest in Docks de France may unsettle some investors as it is clear that a further French foray will come in time. With analysts sticking to their profit forecasts of pounds 740m for the current year, Tesco's shares are on a forward rating of just 12. Hold.

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