When you pay to sell a business

Mergers & Acquisitions are often the glamorous side of business. CEOs love  them - you go through the excitement of doing a deal, get on to the papers and TV, become famous etc etc. Most of the haggling on the deal is on the price - how much the buyer is willing to pay the seller. But how about a M&A transaction where the seller has to pay the buyer in order for the buyer to buy the business !! Fanciful ? Well, that's exactly what has happened with the sale of Fresh & Easy by Tesco to Ron Burkle.

Tesco is an UK based grocery retail giant; it is the third largest retailer in the world. From the UK, where it is a household name, it has expanded in Europe and Asia. But in the US, the largest retail market in the world, Tesco was non existent. In 2006, it decided to foray in to the US with the branding  of Fresh & Easy - in small store grocery format, primarily in the Western states. It never took off and Tesco faced mounting losses despite opening some 200 stores. Its investment and trading losses cumulatively mounted to some £ 1.8 bn. Something had to give.

Tesco tried to sell, but there was no buyer. Finally it found a buyer willing to take it on, but only if Tesco lent him £ 150 m in loans. This is unusual - we have heard of companies being sold for $1, but for something to be sold at negative value is rather unique. The reason why Tesco was willing to do this was simply that the cost of closing the stores and making all the employees redundant would have been far greater than what they were able to finally strike in the deal.

Why is Ron Burkle doing this deal. Evidently he believes he can make a success of this business. You have to be somewhat sceptical about this - If Tesco, a great company, could not succeed, could he ? But then in the retailing world, the US is for Americans and Europe is for Europeans. Even Walmart has not succeeded in creating a great business in Europe despite acquisitions. And no European retailer has really succeeded in the US.  Not sure why this is so, for you would expect retailing to be a pretty similar business anywhere, but that's the way it is.

It must have been extremely humiliating for Tesco to do this deal. Quite apart from paying somebody to take away a business, it represents a failure of their strategy to enter the US. They are admitting defeat and walking away, perhaps not to enter back for a long time, if at all. Its actually a more far reaching retreat for Tesco - they recently announced that they were in negotiations to put their Chinese business in a joint venture with a Chinese company. Retailing is a pretty brutal business.

I'm sure Tesco's boss Philip Clarke is not going to be on TV or on the newspapers for this one.