Check it out

Tesco takeover looks less and less crazy

Could a Tesco takeover check out? Until recently, the idea of a merger, buyout or breakup of Britain's biggest retailer would have been unthinkable. But September 22's revelation of overstated guidance caps a terrible run. A stock worth more than 450 pence in April 2010 now changes hands at just over 200p a share. While a deal remains difficult and unlikely, the crisis will lure some to run the numbers.

A shrunken market cap of roughly £16.5 billion ($27 billion) means Tesco is still huge, but not necessarily off-limits. It is also tempting to think there could be extra value lurking within its aisles. The property portfolio alone has a "market value" of £34 billion, the last annual report says. Other assets could be sold off. Nomura values outposts in Malaysia, South Korea, and Thailand at £7.2 billion. Dunnhumby, the Clubcard data wizards, could be worth another £1 billion or more. Tesco Bank could also go.

The list of potential suitors is short, though. The $24 billion Carrefour could theoretically propose a merger but it is still righting itself. Also in France, the Mulliez family, valued at euro 20 billion by Challenges magazine, could be interested. However, they have limited access to funds because their retailer, Auchan, is private.

The largest private equity firms and their friends at the world's biggest sovereign wealth funds could also peek. After all, some buyout houses recently looked at Wm Morrison, a smaller UK rival to Tesco. But the amounts of debt and equity required would be huge: a takeout at a 35 per cent premium means an enterprise value of £30 billion. The payoff would have to be immense.

Any bidders would need to be confident both about Tesco's accounts, and about the British grocery market, despite the huge challenges posed by hard discounters and online retailers. They would also have to figure out how to unlock the value of Tesco's property, and whether it could regain competitiveness while also handling a higher debt load. So the idea of Tesco being "in play" still looks pretty remote. But no longer impossible.