Just six weeks into his job, Tesco boss Dave Lewis must look at selling assets in Britain and abroad as he battles to raise funds to pull the world's No.3 grocer out of the deepest crisis in its 95-year history.
Trading at the British retailer has deteriorated to such an extent that its debt and ballooning pension deficit mean it could do with more cash. And that'seven before it starts to consider the cost of a plan to revive sales.
Some analysts and investors think Lewis should take advantage of his status as a new arrival to ask shareholders for money, rather than selling off valuable businesses such as its stores in Thailand or customer data specialist Dunnhumby.
But a rights issue, which some think should top 3 billion pounds ($4.8 billion), could prove a hard sell when Tesco is in the midst of investigations into the discovery of a 250 million pound black hole in its accounts.
Plus, several investors want to see the recovery plan first.
"No rights issue without a detailed strategy and without first trying to sell non-core assets at good prices," said David Herro of investors Harris Associates, which recently cut its stake in Tesco to 1 percent from 3 percent.
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Harris, which has $130 billion of assets under management, is not convinced Tesco will need a rights issue at all, unless UK operating profitability totally collapses.
Yet pressure is building on Tesco's finances. Its adjusted net debt of 6.6 billion pounds is now 3.2 times operating cash flow, way ahead of a company target of 2.5 times and likely to rise, according to Morgan Stanley. Its debt-to-equity ratio is 0.76 versus an industry median of 0.53, Reuters data show.
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Meanwhile, its pension deficit is 3.2 billion pounds from 2.4 billion a year ago.
Those factors, plus plunging profits, mean credit ratings agencies have warned they could downgrade the firm. A one notch cut would leave Tesco a single notch above "junk" status.
Once an apparently unstoppable engine of growth, Tesco started to hit problems in the late 2000s when it held back investment at home to spend on new operations in Asia and eastern Europe, and an expensive failure in the United States.
The mistakes cost it dear, as it was slow to respond to changes in shopping habits. Its big out-of-town stores lost favour as shoppers moved to buy more locally and online, while discounters Aldi and Lidl and upmarket chains Waitrose and Marks & Spencer put the squeeze on the middle ground.
The crisis came to a head this year, with three profit warnings in 64 days and the discovery of the accounting mistake, leaving billionaire Warren Buffett to describe his near 4 percent stake in Tesco as a "huge mistake". He has since cut it.
HSBC analyst David McCarthy thinks Lewis should act quickly, and ask shareholders for at least 3 billion pounds to fight back against its main British rivals -- Wal-Mart's Asda, Sainsbury's, and Morrisons.
He believes that could also block Sainsbury's from following a similar path as it too has come under trading pressure.
"With Tesco addressing some of its problems by using a rights issue, this would limit the ability of its competitors to go down a similar route to respond to a rebasing in profits," he said. "Investors should only back one horse in this race."
But a rights issue could be complicated by the accounting scandal. Lewis has had to suspend eight senior staff over the profit mis-statement and is grappling with an internal forensic investigation and a probe by Britain's financial regulator.
"When you go to London markets to raise capital you need all these things signed off," one banker with experience in London equity fundraisings told Reuters. "You wouldn't want to raise capital and then find out there were more holes."
Lewis is expected to update the market on Tesco's own investigation on Oct. 23 along with delayed first-half results.
Investors and analysts think he may use his first public presentation to lower profit forecasts again and announce a further dividend cut, following a reduction in August.
Major strategic decisions are likely to come later -- another reason why shareholders might be cool on a rights issue.
"Tesco needs to simplify the group by selling assets, strengthening the balance sheet and reinvesting into the core UK business," a top 20 investor said on the condition of anonymity.
"The most enhancing way (to strengthen the balance sheet) is to sell assets and not dilute shareholders with a rights issue."
That would follow the path taken by France's Carrefour, which has listed or sold assets abroad to focus on the turnaround of its domestic business.
"A real conundrum"
Tesco's most lucrative non-core assets are its businesses in South Korea and Thailand. Morgan Stanley estimates the South Korean business, if listed, could be valued between 3.2 billion pounds and 4.9 billion pounds. It puts Thailand at between 4.3 billion pounds and 7.2 billion pounds.
Analysts are less optimistic around eastern European assets where there are few local players that might be buyers.
Morgan Stanley values Tesco's international operations, excluding Ireland, at between 10.2 and 17.3 billion pounds.
British assets Tesco could put on the block include Dobbies garden centres, and Dunnhumby, the consumer data company behind the Clubcard loyalty scheme.
Tesco Bank could also be listed, while the restaurant group Giraffe and a stake in British coffee chain Harris & Hoole could be sold. However, investors note that these could help draw customers back into stores.
A person familiar with the situation has told Reuters that Tesco is reviewing around 50 different options, including a rights issue and the sale of non-core assets.
Some decisions are already being made. Lewis has informed staff at the Blinkbox digital service it will either be sold or closed and the embarrassing revelation that the group had recently taken hold of its fifth corporate jet was met with the announcement that all would be sold.
However, asset sales are not a solution in themselves, and the risk is that Tesco sells high growth businesses to invest in more price cuts and promotions in Britain, which so far have done nothing to revive its fortunes.
"You have a real conundrum," one sector banker said. "Investing in prices and promotions is just money down the drain," he said of the highly competitive U.K. grocery market.
"Lewis has got so much on his plate, he will have to think about divestments. But the Asian businesses in particular are good -- is it a good time to sell a high growth business?"
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