Tesco, the U.K. supermarket chain, announced on Friday that it is selling its retailing banking business to Barclays for an initial amount of £600 million. The deal will also involve an additional payment of £100 million after certain regulatory capital amounts are settled and transaction costs are accounted for.
Share buyback and financial allocation
As part of this transaction, Tesco plans to utilize the majority of a combined £1 billion, which includes a special dividend previously declared by Tesco Bank, for a share buyback scheme. This move aims to maximize shareholder value.
Retaining key services
While the retailing banking business will now be under Barclays, Tesco will continue to maintain control over its insurance, ATMs, travel money, and gift cards. These services contribute an estimated operating profit of £80 million to £100 million on a proforma basis. Tesco anticipates that this deal will have a positive impact on its earnings per share.
Assets acquired by Barclays
By acquiring the retailing banking business, Barclays will take ownership of credit cards, unsecured personal loans, deposits, and the associated operating infrastructure. The business being acquired holds approximately £8.3 billion in unsecured lending balances, which exhibit a credit quality consistent with Barclays’ existing UK portfolios. In the 12-month period ending February 2023, this business generated an adjusted operating profit of around £85 million.
Strategic partnership between Barclays and Tesco
In addition to the acquisition, Barclays will enter into an exclusive strategic partnership with Tesco for a duration of 10 years. This partnership entails the marketing and distribution of credit cards, unsecured personal loans, and deposits under the Tesco brand. In return, Barclays will pay £50 million per year to Tesco.
Market performance
Thus far in the year, Tesco shares (UK:TSCO) have experienced a 3% decline, while Barclays shares (UK:BARC) have seen a 7% decrease in value.