UK Supermarket Chain Tesco Pays $550M to Set Up JV in China with CRE

Following the announcement on 9 August 2013 of their agreement on a Memorandum of Understanding, Tesco PLC TSCDY and China Resources Enterprise, Limited CRHKY 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 “Joint Venture” or “JV”). Key highlights: The JV combines Tesco's best-in-class retail practices, international sourcing and digital/ecommerce capabilities with CRE's strong local knowledge and brand to create a business with sales approaching £10bn, in which Tesco will have a 20% stake. The JV will be the leading retailer in seven of the eight most populous and highest GDP provinces in China. Tesco will combine its 134 Chinese stores as well as its Chinese shopping mall business (together “Tesco China”) with the China Resources Vanguard business (“CRV”) of 2,986 stores. The JV will secure significant synergies from combining the two operations. Tesco will make a cash contribution to the JV of HK$2,325m (c.£185m) Tesco will also make a payment of HK$1,000m (c.£80m) to CRE at completion and a further HK$1,000m (c.£80m) on the first anniversary of completion. Tesco will have two seats on the board of a maximum of 10 members. Completion is expected in the first half of 2014, subject to regulatory and CRE shareholder approval. Details of the transaction The JV will benefit from CRV's strong brands, deep understanding of local Chinese customers, established nationwide infrastructure, local sourcing skills, strong property development and management skills and deep and established local, regional and national government relationships. Tesco will bring to the JV retail best practices in areas such as retail operations, customer analytics, private label development, supply chain management, retail management development as well as its strong international sourcing capabilities, digital commerce and globally-recognised expertise in the development of online sales channels. The parties expect the JV to be able to secure significant synergies from combining their respective skills and scale therefore resulting in faster growth and enhanced profitability. Tesco will receive an initial shareholding of 20% of the enlarged issued share capital of the JV entity, with a right to acquire a further 5% at fair market value after five years following completion of the transaction. The board of directors of the JV (the “JV Board”) will consist of a maximum of 10 directors. Tesco will be entitled to appoint two directors to the JV Board and will have a range of shareholder and governance rights consistent with its 20% shareholding. Philip Clarke and Laurie McIlwee will represent Tesco on the JV board. Tesco will also make a payment of HK$1,000m to CRE at completion and a further HK$1,000m on the first anniversary of completion. Upon completion of the transaction, Tesco's interest in the JV will be accounted for as an associate. Tesco's cash contributions will be funded from existing Tesco resources. The transaction constitutes a Class 2 transaction for the purposes of the UK Financial Authority's Listing Rules and, as such, Tesco shareholder approval is not required. Completion of the transaction and therefore formation of the JV is subject to written CRE shareholder approval and is subject to the satisfaction (or, where applicable, the waiver) of certain closing conditions, including securing the necessary anti-trust and regulatory approvals. Tesco has received an irrevocable undertaking from CRH (Enterprise) Limited pursuant to which it will exercise all voting rights attaching to its shareholding in CRE to vote in favour of all resolutions proposed to CRE's shareholders in connection with the implementation of the JV. The issued share capital of CRE as of today is 2,402,809,120, in which CRH holds 1,232,764,380, representing app. 51.31%. It is expected that the transaction will complete during the first half of 2014.