Fresh & Easy Deal Wilting?

Tesco's sale of U.S. chain to Burkle's Yucaipa reportedly going beyond freshness date

Published in CSP Daily News

EL SEGUNDO, Calif. -- Hopes are fading for a sale of Tesco Plc's U.S. small-format grocery business Fresh & Easy Neighborhood Stores Inc. With no deal yet struck, two people familiar with the situation suggested that the most likely outcome would be a closure or breakup of the chain, reported The Financial Times.

Analysts said the prospect of shutting Fresh & Easy, or dismantling it piecemeal, raised the possibility of Tesco incurring more costs than the one-billion-pound (approximately $1.5 billion U.S.) writedown it announced in April.

Tesco was reportedly on the verge of a sale of Fresh & Easy to The Yucaipa Cos., the investment company of U.S. billionaire Ron Burkle. He is recognized as a major investor in the retail, manufacturing, distribution and hospitality industries. He has served as chairman and controlling shareholder of numerous companies including Alliance Entertainment, Golden State Foods, Dominick's, Fred Meyer, Ralphs and Food4Less.

Jim Keyes, the former CEO of 7-Eleven Inc. and Blockbuster Inc., and who owns the Wild Oats upscale grocery name, would serve as CEO of the new venture, people familiar with the discussions and who asked not to be identified because the process isn't public, told Bloomberg in June.

The talks between Tesco and Burkle have stalled, however, several people familiar with the situation told the newspaper. The sticking point in conversations with buyers has been Tesco's desire for a clean break from the United States, said the report. It wants to avoid any situation where it or its shareholders retain liabilities for Fresh & Easy after an exit.

The current situation is thought to be fluid, however, and it is possible it could yet change.

Tesco declined to comment to the Times.

Clive Black, analyst at Shore Capital, said, "The prolonged timescale is a cause for concern."

He said Tesco was continuing to incur trading losses from Fresh & Easy, although they would be treated as discontinued operations. It also raised the prospects of higher cash costs, from terminating leases, selling the manufacturing facility and redundancy payments.

People familiar with the situation said that Tesco had already made substantial writedowns, and had never expected to receive significant sums for the loss-making business.

Click here to view the full Financial Times report.