Barclays to Buy Tesco Banking Arm for Around $760 Million — Update

By Elena Vardon

British lender Barclays has agreed to buy Tesco's retail banking arm for a consideration of around 600 million pounds ($757 million) in a deal that allows the U.K. grocer to focus on its core food offering and return cash to shareholders.

Barclays UK will take over Tesco Bank's operations in credit cards, unsecured personal loans and deposits, as well as its operating infrastructure, the companies said on Friday. This includes around GBP8.3 billion of unsecured lending balances and around GBP6.7 billion in customer deposits.

The deal "will add incremental scale, income and so profitability to Barclays' already strong credit card business, which has seen balances shrink in the U.K. following the pandemic," Shore Capital analysts wrote in a note to clients.

Barclays intends to integrate the business and its 2,800 employees into its infrastructure. The lender is financing the acquisition with its existing resources, it said.

Tesco will keep its insurance, ATMs, travel money and gift cards activities, which it says are capital-light and profitable businesses, it said. "The transaction will also significantly reduce our financial liabilities, in turn strengthening our balance sheet and allowing us to focus on continuing to grow our core retail business," Tesco Chief Executive Ken Murphy said. The sale removes GBP7.7 billion of capital-intensive assets and GBP6.7 billion of financial liabilities from its books.

Supermarket chain peer J Sainsbury said last month that it is planning a phased withdrawal from its banking business as it focuses on its core retail activities but will keep on offering some financial services through third parties.

Barclays and Tesco also agreed on a 10-year partnership through which the lender will sell Tesco-branded banking products and services, for which Tesco will receive an annual income for the use of its brand and its channels.

"This strategic relationship with the U.K.'s largest retailer will help create new distribution channels for our unsecured lending and deposit businesses," Barclays CEO C.S. Venkatakrishnan said. "We are able to bring our expertise in partnership cards developed over decades in the US to enhance further the highly successful Tesco Clubcard loyalty scheme."

Tesco expects to get around GBP1 billion in cash from the disposal--which also includes around GBP100 million in net cash after transaction costs and the settlement of some regulatory capital amounts--and the special dividend of GBP250 million paid by Tesco Bank in August, which it intends to return to shareholders via an incremental share buyback.

The grocer calculates that it will to keep more than half of this year's profits from Tesco Bank from the partnership and retained activities, and sees pro forma adjusted operating profit between GBP80 million to GBP100 million. The business made an adjusted operating profit of around GBP85 million in the year ended February 2023.

The transaction is set to close in the second half of 2024 subject to approvals.

Shares in Barclays traded 0.9% lower at 141.82 pence and Tesco's were up 1.2% at 0845 GMT while the London's blue-chip FTSE 100 edged down 0.05%.

Write to Elena Vardon at elena.vardon@wsj.com

(END) Dow Jones Newswires

February 09, 2024 04:19 ET (09:19 GMT)

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