Tesco is gearing up for the sale of its mobile business as the supermarket group looks to pare back its sprawling empire and reduce a £22bn debt mountain.
With 4 million customers, Tesco Mobile has the largest subscriber base outside of the four mobile network operators. The service is a joint venture with O2, and Tesco’s 50% share is thought to be worth £100m a year in profits.
Full mobile networks are currently changing hands for multiples of seven times profits, but analysts said Tesco Mobile might fetch a multiple of eight or more because the business does not require capital expenditure in broadcast masts and other infrastructure.
The venture is a virtual network: it does not own masts, but buys airtime at wholesale rates from O2, which is then resold at a discount to price conscious consumers.
“Tesco is obviously going through an asset thought process,” said analyst Guy Peddy at Macquarie bank. “It sold its broadband business, now it’s thinking of selling its mobile business.”
In January, TalkTalk swooped on Tesco’s broadband business, having already secured its pay-per-view movie service Blinkbox. The company is also seen as a contender for the mobile arm.
Dave Lewis, Tesco’s chief executive, is under pressure to cut costs and sell off businesses in order to pay down some of its £21.7bn in debts, including lease commitments and its pension deficit. Ratings agencies have cut the retailer’s debt to junk status as profits and sales have slumped in the face of a supermarket price war kicked off by the rise of discounters such as Aldi and Lidl.
Tesco dived to a £6.4bn statutory loss, before tax, in the year to 28 February and underlying profits, which exclude one-off items such as property writedowns, now sit at just £961m.
The company has already sold off its fleet of corporate jets and a music streaming service to Guvera. It’s also in the process of marketing Dunhumby, the analysis firm behind the Tesco Clubcard, for a rumoured £2bn. Advertising agency WPP is among the bidders.
Launched in 2003, Tesco mobile operates in a crowded market. BT is moving into mobile, TalkTalk has a thriving virtual network, using airtime rented from O2, and Sky is planning to enter the business next year, also in partnership with O2.
Meanwhile, margins are being squeezed. Virtual networks made money from reselling voice calls and text messages at cheaper rates than network operators, but today’s smartphone owners want to use the internet and margins on data are less easy to predict.
Analyst Kester Mann at consultancy CCS Insight said: “It is a challenging market, it’s only going to become more competitive, and now is a good time to think about exiting.”
O2 is seen as an obvious buyer, because Tesco’s customers are already on its network. But O2 itself is up for sale. Spanish owner Telefónica has agreed a £9.25bn deal with Hong Kong conglomerate Hutchison Whampoa, which wants to merge O2 with its Three network to create the UK’s largest mobile operator.
Both Tesco and Telefónica declined to comment.
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