LONDON - Britain's biggest retailer Tesco agreed a major deal on Wednesday to create a retail giant in China, as it seeks to offset "challenging" trading conditions in Europe which hit profits hard.
Tesco will create a joint venture with China Resources Enterprise (CRE), it revealed in a statement, alongside news that first-half net earnings slumped by a third on flat revenues, restructuring costs, tough overseas markets and lower profit from property sales.
London-listed Tesco -- the world's third-biggest supermarket group after US retailer Wal-Mart and number two Carrefour of France -- added that 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," a statement said.
The companies had revealed in August that they were in exclusive talks over a deal.
Hong Kong-listed CRE will have a stake of 80 per cent and Tesco will have 20 per cent, but this can rise to 25 per cent after five years.
"We are delighted to work with CRE to create the leading Chinese retail business," said Tesco chief executive Philip Clarke in the statement.
"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.
"This is very good news for customers and shareholders and a further demonstration of our commitment to build sustainable, profitable businesses, establish multichannel leadership in all of our markets and pursue disciplined international growth."
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 that "the joint venture brings together the individual strengths and advantages of Tesco and CRE."
The deal would link local knowledge of customer behaviour with the best practice of an international group.
The agreement would benefit both groups and would propel the internationalisation of China's retail industry.
"The partnership will be strongly placed to lead the development of retailing in China and create value for shareholders and customers," he said.
Group 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 two years.
The London-listed supermarket giant 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.
In another heavy blow, Tesco reported that net profits dived 33.6 per cent 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 profits after taxation of ￡1.24 billion in the same period a year earlier. Revenues rose by just 1.9 per cent to ￡31.91 billion.
"The challenging retail environment in Europe has continued to affect the performance and profitability of our businesses there," added Clarke in the results statement.
"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."
The Chinese deal is expected to be completed in the first half of 2014 but remains subject to regulatory and CRE shareholder approvals.
Tesco will make a cash contribution of ￡185 million to the venture. It will (See attached file: tescokl.jpg)
Tesco shares drop on news of tumbling profits
In reaction to slumping profits, Tesco's share price topped the fallers board on the London stock market.
Tesco stock sank 4.01 per cent to 344.07 pence on the British capital's FTSE 100 index of leading companies, which was down 0.85 per cent at 6,404.87 points.
In Britain, Tesco remains under pressure from supermarket rivals such as Sainsbury's, Wal-Mart division Asda, and German-owned discounters Aldi and Lidl.