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Friday, August 18, 2006

Berkshire Triples Stake in Tesco

From Value Discipline

Berkshire has increased its stake in Tesco, the UK based, but global food retailer.

According to Bloomberg News, Berkshire, which does not have to report to the SEC any of its holdings traded on foreign exchanges, now has a total of 177.8 million shares of Tesco, more than tripling its stake from the previously reported 57.6 million shares.

The shares were acquired, as per normal, through its insurance subsidiaries, Geico with 32.4 million shares, GenRe with 76.8 million shares, Medical Protective with 5.15 million shares, and United States Liability with 5.81 million shares.

I find this a very interesting move in a very interesting retailer. First of all, at present exchange rates and securities prices, Tesco is now a larger position than Wal-Mart representing almost $U.S. 1.2 billion (correction from original post) versus about $900 million in WalMart.

Tesco’s international exposure is relatively immature, representing about one quarter of sales but over half of selling space. There is considerable exposure to emerging markets with business in Hungary, Poland. the Czech Republic, Slovakia, Turkey, Malaysia and Thailand. There is also exposure to Ireland and Japan.

Tesco has well-above average ROIC, when measured against other foodretailers. The ROIC was 12.8% for its February 2006 fiscal. This figure has shown steady improvement over the last five years. The company has a goal of achieving an ROIC target of 14.8% down the road. The company enjoys strong cash flow generation. Were it to cease its expansionary capital spending, the company would be debt free in about two years.

There is also substantial real estate value in Tesco as it is the largest property company in the UK

The company has also treated its shareholders as partners with significant share buybacks in the last couple of years.

I will be doing a more complete review of Tesco and its operations in the next couple of days, but wanted to get at least the preliminary information out to you as soon as I could.

Disclaimer: I, my family, and some clients have a current position in Wal-Mart and Berkshire Hathaway. None of us have a current position inTesco.

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