Tesco to pay $1.9 billion for 36 South Korean stores

Tesco on Wednesday made its largest-ever acquisition, paying $1.9 billion for 36 South Korea stores that will have changed ownership twice in less than three years.

The British supermarket chain is paying 958 million pounds to E-Land Group, a fashion retailer, for 36 Homever stores. The move will give Tesco more than 50% additional space in the country.

Tesco (TSCDY: 25.56, +0.31, +1.2%) (UK:TSCO: news, chart, profile) will convert the stores, which until 2006 were in the hands of France's Carrefour, into its Homeplus format.

Tesco is paying roughly what E-Land had paid Carrefour (CRERF:  71.50, +1.05, +1.5%) (FR:012017: news, chart, profile) in 2006 for the stores.

Other international retailers also have struggled in South Korea, with Wal-Mart Stores (WMT:  56.65, -1.37, -2.4%) getting out of the country in 2006.

Most of the stores are in the greater Seoul and Gyeonggi area. Tesco expects the deal to be "broadly" earnings neutral in the second year after acquisition and to lift earnings afterward.

Though headquartered in the U.K., Tesco has a sizeable international presence, with 814 stores in Asia and 747 stores in Europe accounting for about a quarter of its profit.

Samsung Tesco, its Korean unit, recorded annual sales of 2.7 billion pounds - Tesco overall had sales of 51.8 billion pounds in the year to February 2008.

Justin Scarborough, an analyst at ABN Amro, said Tesco likely will have to shed some stores in Korea on competition concerns, as it's currently the No. 3 retailer and will vault to No. 1 after the transaction closes.

"If Tesco could achieve a similar margin on these stores as it currently does in the country, it would imply over 100 million pounds of operating profit," he estimated in a note to clients.

Shares of Tesco slipped 0.1% in London but are up more than 11% in the past month.