Tesco seals China deal as profits slump

Tesco on Wednesday pushed ahead with plans to create a supermarket giant in China, as Britain's biggest retailer seeks to offset a slump in profits on weaker European sales. Tesco will combine its Chinese business with that of Hong Kong-listed retailer China Resources Enterprise (CRE) to form a joint venture, it revealed in a statement. The British supermarket -- the world's third biggest --  announced also that its net profit slumped by a third in the group's first half, also on restructuring costs and a decline in income from the sale of property. Tesco reported that net profits dived 33.6 percent to £820 million ($1.3 billion, 981 million euros) in the first half of its financial year, or 26 weeks to August 24. That compared with profit after tax of £1.24 billion in the equivalent period a year earlier. Revenue rose 1.9 percent to £31.91 billion. London-listed Tesco said the Chinese move was part of its international strategy to tap further into fast-growing economies. "Tesco and CRE today announce that they have entered into definitive agreements to combine their Chinese retail operations to form the leading multi-format retailer in China," the statement said. The pair had in August already revealed that they were in talks over the move. CRE will have a stake of 80 percent and Tesco 20 percent, although this may rise to 25 percent after five years. “We are delighted to work with CRE to create the leading Chinese retail business," Tesco chief executive Philip Clarke said on Wednesday. "Through this deal we have a strong platform in one of the world's most exciting markets and it will move us more quickly to profitability in China.” The new venture will combine Tesco's 134 Chinese branches, as well as the firm's Chinese shopping mall business with the China Resources Vanguard business of 2,986 outlets. CRE chief executive Hong Jie said "the partnership will be strongly placed to lead the development of retailing in China and create value for shareholders and customers". The Chinese deal is expected to be completed in the first half of 2014. Tesco will make a cash contribution of £185 million to the venture. It will also pay £80 million to CRE following completion, and another £80 million on the first anniversary. Tesco seeking to transform fortunes The deal marks the latest attempt by Tesco to transform its fortunes after last year suffering the first drop in annual profits for almost two decades. The group is battling weak sales in main market Britain, and over the past year decided to close its failed US division Fresh & Easy and to exit from Japan. "The challenging retail environment in Europe has continued to affect the performance and profitability of our businesses there," Clarke said Wednesday. But he added: "The investments we have made to improve our offer for customers in the region are already starting to take effect and we expect a stronger second half as a result." Tesco shares drop on news of tumbling profits Tesco's share price recovered from early sharp losses in reaction to the earnings announcement, to end the day 0.31-percent lower at 358 pence. In Britain, Tesco remains under pressure from supermarket rivals such as Sainsbury's, Wal-Mart division Asda and German-owned discounters Aldi and Lidl. Sainsbury's meanwhile announced Wednesday that its sales grew 5.0 percent in the group's  second quarter, compared with a year earlier, boosted by demand for clothing and general merchandise. "Tesco is clearly undergoing a period of transition in both its UK and overseas businesses and the resultant pressure on profitability comes as no surprise," said analyst Bryan Roberts at Kantar Retail consultancy. Last month, Tesco began selling its own budget-priced tablet computer, known simply as Hudl, in an attempt to boost revenue at its stores in Britain.