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Wednesday, 7 October 2015

Has the botched sale of dunnhumby cost Tesco shareholders $1 billion?

Has the botched sale of dunnhumby cost Tesco shareholders $1 billion ?

Normally if you choose not to sell an income producing asset at least you get the consolation of keeping the income stream. A potential cash windfall is offset by continued and hopefully growing earnings.

But that won't be the case for Tesco who, according to observer estimates,  have given away income of about £50m per year to their former JV partner Kroger. They did this because Kroger had a change of ownership clause which was triggerable if dunnhumby came under new ownership. By negotiating an exit from the Jv and keeping all of the necessary people and technology they require, Kroger are able to continue to benefit from the services that dunnhumby were providing them but without having to pay fees to the UK organisation. As a quid pro quo,Kroger enabled dunnhumby to continue with a small US operation, search for another USA grocery partner and to be sold to a 3rd party.

The agreement has cost Tesco about £50m per year in reduced income (money that would have flowed to them via the USA JV) as it is highly unlikely that they will be able to find another partner that is willing to pay anywhere near the fees they received from Kroger. This is because Kroger are much bigger than their grocery peers and the other major grocers already have alternative analytics partners who are providing similar services to those provided by dunnhumby.

The second major clanger dropped during the process has been to redefine the contract term that exists between Tesco and dunnhumby. dunnhumby's profits arise as a consequence of its monopoly rights to use Tesco's Clubcard data. This was an in perpetuity arrangement that would have been attractive to a potential acquirer of dunnhumby but potentially might have constrained Tesco in years to come. So it made sense to put a lengthy contract term in place. By establishing a 5 year agreement, Tesco have thrown the baby out with the bath water, giving an acquirer next to no time to recoup it's investment and hence there are no longer any willing acquirers.

Consequently there is no sale and dunnhumby is left without its prized USA asset and the source of 60%+ of its profits and value!

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