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Tesco retreat shows cost of China ambition

Tesco's retreat from China has revealed the true cost of its Asian ambition. The terms of the UK retailer's joint venture with China Resources Enterprise show just how little it has gained from its nine-year attempt to gain a foothold in Asia's biggest market. Even the biggest players can't stomach open-ended losses.

Tesco is folding its 134 Chinese stores, 11 malls and some property into CRE's larger Chinese retail business. It's also making a cash payment of 4.3 billion Hong Kong dollars ($560 million). In return, it gets a 20 per cent stake in the combined business.

The cash top-up gave Tesco an extra five per cent of the venture, according to a person familiar with the matter. This implies the entire venture is worth 86.5 billion Hong Kong dollars. It also suggests that the assets Tesco contributed were worth just some 13 billion Hong Kong dollars - or about $1.7 billion.

Compare that return to Tesco's investment in the business. Based on public disclosures alone, the company has injected more than $1 billion into its China business over the past decade. Tesco has previously published that the Chinese assets it had earmarked for disposal were £2.6 billion ($4.2 billion) - though this includes property the retailer could not profitably develop.

It's safe to assume that Tesco has weathered heavy losses over the years. Recent disclosures show that in the year to February 2013, its China businesses lost close to 3 billion Hong Kong dollars. Though Tesco prides itself on its deep pockets and long-term view, even the largest retailers cannot stomach such losses indefinitely. The CRE joint venture lifts that burden from Tesco's balance sheet. The combination should also yield cost savings as well as synergies in the area of pricing knowledge, distribution and e-commerce. For Tesco, the venture also has a definite shelf life: Tesco has the option to force a public listing of the JV after seven years, or be bought out by CRE. Its retreat from China may be gradual, but it is only heading in one direction.