- Sale to net Tesco £700 million
- Deal seen as earning-enhancing
- Surplus cash to boost buyback
High-street lender Barclays (BARC) has signed a 10-year strategic deal with supermarket giant Tesco (TSCO) to provide customers with supermarket-branded banking products and services.
As part of the agreement, Barclays will pay Tesco £600 million for its banking operations in loans, savings and credit cards plus a further £100 million after settling certain regulatory capital amounts.
Barclays shares were flat at 143p in mid-morning trading after an early pop while Tesco shares added 2% to 286p.
SENSIBLE STRATEGIC MOVE
By selling its banking operations to Barclays, Tesco can remove £7.7 billion of capital intensive assets and £6.7 billion of liabilities from its balance sheet while at the same time receiving an annual income for the use of its brand and thanks to Barclays’ participation in the Clubcard programme.
The retailer will retain its capital-light financial activities such as insurance, travel money and gift cards, so the combined annual adjusted operating profit from these and the partnership with Barclays is expected to be between £80 million and £100 million or more than half the current-year forecast for the bank as it stood.
Moreover, taking into account the use of the cash to increase the share buyback, the deal is expected to be ‘mildly accretive’ to earnings per share.
Around 2,800 Tesco Bank employees will move over to Barclays, including the senior management team, which will represent another big saving, and will continue to develop new Tesco-branded products.
ANALYST VIEWS
Shore Capital banks analyst Gary Greenwood said the deal looked attractive for Barclays as it was only paying 0.6 times book value for the Tesco business, although he caveated that with the fact Barclays shares themselves only trade on 0.4 times book value so shareholders may question whether it is the best use of capital.
‘That said, it will add incremental scale, income and so profitability to Barclays already strong credit card business, which has seen balances shrink in the UK following the pandemic’, says Greenwood, who has a Buy rating and a 290p price target on Barclays.
Shore's retail expert and head of research Clive Black described the sale as ‘an outstanding outcome’ for Tesco shareholders and reiterated his Buy recommendation on the supermarket group.
