UPDATE 2-Tesco cuts China bet, strikes deal with CRE Vanguard
* Tesco to take just 20 pct of venture with state-run firm
Deal may affect chances of CRE bidding for Li's supermarkets
* Other foreign retailers have pulled out of China
* Tesco has also retreated from other global markets
By Denny Thomas and Donny Kwok
HONG KONG, Aug 9 (Reuters) - Tesco Plc will slash its China exposure by taking just 20 percent of a new venture with a state-run company, a deal that underlines the travails foreign retailers have had in the Chinese market and allows the British retailer to focus on turning around its domestic business.
Lured by the prospect of a rapidly growing middle class in the world's second-biggest economy, many foreign firms have waded into China's retail market only to find they lack local expertise, particularly in building strong relationships with suppliers.
After nearly nine years of independent operation in China and following decisions to exit the U.S. and Japan markets, the world's third-largest retailer said it would team up with China Resources Enterprise Ltd, ceding control but bringing their combined market share close to market leader Sun Art Retail Group Ltd.
"Its partner brings formidable scale and local access, so it is hard to fault the logic of the move, even if it reads badly for the initial gung-ho expansion into China under previous management," London-based independent retail analyst Nick Bubb said, adding that Tesco's China business was in the red.
China has proven to be conundrum for many foreign retailers. Germany's Metro AG said in January it was pulling out of the consumer electronics business in China while Home Depot Inc said last year that it would close all seven of its big-box home improvement stores.
"Tesco has been struggling in China and has been losing money. Similar to Carrefour, they had issues in their home market which they had to resolve," said one Hong Kong-based M&A banker.
"This may look win-win, but in reality, Tesco is saying 'I can't figure out China'," he said.
Media reports have said Tesco will pay CRE a few hundred million pounds as part of the deal.
The world's biggest and second biggest retailers, Wal-Mart Stores Inc and French retailer Carrefour SA are for now slugging it out alone. Wal-Mart, with 380 stores, plans to open another 100 in the next three years while Carrefour plans a steady expansion, targeting 20 store openings a year.
HOME MARKET FIRST
The joint venture would create a business with some 10 billion pounds ($15.6 billion) in sales. Last year, Tesco's China operations generated sales of 1.43 billion pounds ($2.2 billion).
CRE's Vanguard unit operates 2,986 stores, mainly hypermarkets or supermarkets, across China and Hong Kong, while Tesco has 131 outlets.
CRE shares rose 7.8 percent to HK$25.70, outpacing a 0.7 percent rise in benchmark Hang Seng share index. Tesco shares were up 1.2 percent, compared with 0.2 percent rise in FTSE 100 Index.
"Tesco...finally finds a big giant to salvage them," said Kenny Wu, an analyst at Societe Generale Ji-Asia in Hong Kong, adding that the deal also works for CRE which is keen to expand its market share and has the cash to do so.
The deal comes at a time when Asia's richest man Li Ka-shing is considering the sale of his Hong Kong supermarket business, worth up to $4 billion. CRE was seen as a potential bidder for that business, but some bankers said the Tesco agreement could keep it too busy to do another deal.
Wal-Mart is considering making a bid for Li's Hong Kong supermarket business, people familiar with matter have said.
This year, Tesco wrote down the value of its global operations by $3.5 billion and announced plans to exit the United States. Last year, it ended a nine-year attempt to crack Japan's tough retail market by effectively paying Aeon Corp , the country's No.2 general retailer, to take its loss-making business there off its hands.
Tesco makes about two thirds of its revenues in Britain, where online shopping, rising petrol prices and weak consumer spending have curbed the need for customers to visit larger stores and buy their big ticket items.
It also invested less than domestic rivals Sainsbury and Asda and is now in the midst of a 1 billion pound push to revitalise the business.
China's hypermarket industry will likely grow to 863.8 billion yuan ($141 billion) by 2015, from an estimated 659.6 billion yuan in 2013, according to Euromonitor.
Sun Art, a joint venture between Taiwan conglomerate Ruentex Group and privately held French retailer Groupe Auchan SA , currently has a 13.6 percent market share, capitalising on its expertise in maintaining competitive prices with local suppliers.
CRE and Wal-Mart each have about 10.9 percent market share while Carrefour has 6.9 percent and Tesco 2.4 percent.