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Saturn Analyst Presentation Saturn Analyst Presentation Presentation Transcript

  • The next step in Retailing Services Taking full ownership of Tesco Personal Finance Tesco Conference Call, 28 July 2008
  • The next step in Retailing Services • Tesco to take full control of Tesco Personal Finance (TPF) – acquiring from RBS the 50% shareholding it does not currently own for a cash consideration of £950 million • Over the last decade, Tesco has built a successful, profitable retailing services business which includes TPF, dotcom and telecoms • Services form an important part of our five-part growth strategy and this is a timely next step in building a platform for the long term • Today Tesco is announcing its ambition for these businesses - to deliver £1 billion per year towards Group profits (2007/08 profit of £384 million, sales of over £3 billion) • Tesco has appointed a new senior team to drive forward the next phase of growth led by Andrew Higginson • Post-completion, Tesco will provide additional financial disclosure in relation to Retailing Services and TPF
  • The TPF business today Tesco Personal Finance • High quality business - strong track record, low bad debt rates, high returns • 2007 profit before tax of £206m, gross assets £8,156m • 5.6m customer accounts, multi-channel sales including 60% on-line • 26 products - in 5 main categories General Insurance Banking Over 60% of 2007 TPF profit before tax 2.7m customers and Credit Cards Personal Loans Personal savings ATMs over 1.2m in-force car products insurance policies 210,000 personal loan 390,000 savings 1.3m active accounts Installed base of over c.4% share of UK customers account customers 2,700 ATMs c.7% market share motor insurance £2.7bn of total £1.6bn loan book Serve c.25m market (Top 5) Total credit card deposits transactions per receivables c.£2bn Typically 5 year fixed month 3 month arrears rate - rate loans 0.4% of active balances
  • Full ownership of TPF • Tesco is acquiring from RBS the 50% shareholding in TPF it does not currently own – Cash consideration of £950m – Funded by existing debt facilities, investment grade credit rating retained – Group net debt estimated to be c.£8bn by year-end – Group balance sheet and income statement effects • Value-creating, earnings-accretive and only mildly ROCE dilutive • Post-completion, Tesco will provide additional financial disclosure in relation to TPF – Separate reporting of revenue and profit – Disclosure of the balance sheet separately from retailing operations
  • The Tesco Income Statement Tesco Group Pro-forma Income Statement (23 February 2008) Tesco Group Pro-forma Income Statement (23 February 2008) £m As reported Eliminate Consolidate 07/08 Impact of 23.02.08 JV 100% TPF (Adjusted consolidation 31.12.07 for 100% 23.02.08 ownership of TPF) Sales (inc. VAT) 51,773 903 52,676 903 Revenue (sales excluding VAT) 47,298 903 48,201 903 Cost of sales (43,668) (378) (44,046) (378) Gross profit 3,630 0 525 4,155 525 Administrative expenses (1,027) (23) (319) (1,369) (342) Profit arising on property-related items 188 188 0 Operating profit 2,791 (23) 206 2,974 183 Share of post-tax profits of joint ventures and associates 75 (64) 11 (64) Finance income 187 187 0 Finance costs (250) (250) 0 Profit before tax 2,803 (87) 206 2,922 119 Taxation (673) 6 (55) (722) (49) Profit for the year 2,130 (82) 151 2,199 69 Note: Trading profit 2,751 (23) 206 2,934 183 Trading margin 5.8% 22.8% 6.1% 20.3% Note: Underlying profit before tax 2,846 (87) 206 2,965 119 Source: TPF accounts, Tesco analysis
  • Timing - why now? • JV structure was appropriate for the first phase of TPF’s growth – and a strong, profitable platform has been built • TPF can grow faster, both in existing and new markets – as a full-service retail bank and as a wholly-owned subsidiary of Tesco • Although discussions were begun in 2007, the RBS restructuring provided the catalyst for the deal • TPF’s current product offer has material market positions in two core financial services categories (motor insurance and credit cards) • There is a growing demand from consumers for better value, simple services in all areas of household finances – and they are more willing to switch between providers
  • TPF – becoming a full-service retail bank • Focus on bringing simplicity and value for customers in sometimes complicated markets • Using our strengths in customer relationship management, store network and strong position on the internet • This will mean: – A more complete range of retail banking and insurance products – Providing convenient access to financial services – Good value, simple, transparent and fair charging structures – Innovation in product and service development – More active cross-marketing – Financial services development in our overseas markets
  • The way forward • The acquisition is likely to complete in the final quarter of 2008 (subject to FSA clearance) • Once Tesco has acquired RBS’ share there will be a period of transition – The c.200 TPF head office staff currently employed by RBS will be transferred under TUPE on completion – Under various Commercial Services Agreements, RBS to provide banking services to TPF for a period of between two and seven years – Insurance-related services will be provided by RBS under a distribution agreement for three years • During this period we will build our own capability and grow the TPF business – Build an appropriate mixture of in-sourced and out-sourced infrastructure – Develop performance of existing products – Broaden product repertoire to provide a more complete banking and insurance offer
  • Governance and management of TPF • TPF to operate its own governance structure and Board – regulated directly by the FSA • Andrew Higginson to remain as Chairman of TPF • In addition to the appointment of Benny Higgins, Iain Clink recruited to act as TPF’s Finance Director • At least two independent Non-executive Directors with significant experience in banking and insurance to be appointed • Two Tesco Non-executive Directors to be appointed in due course • Further senior management appointments to be made • In the shorter term, the transitional arrangements will ensure continuity
  • Summary • Tesco has built a profitable retailing services business with a strong track record • TPF is a key element of the retailing services opportunity – and now needs a different ownership structure to drive forward the next phase of growth – TPF is a very high quality, profitable business with low bad debt rates – Tesco has had very close involvement in the business for over ten years – Tesco knows it well and is part of the reason it is a high quality, low risk business – Tesco has very carefully analysed the acquisition and its financing, structure and risk profile – Tesco is investing in its management, systems and infrastructure to deliver its plans – During a transitional period Tesco is backed up with the proven capabilities of RBS • This move is part of a broader realignment of our retailing services businesses – involving management and reporting • TPF and Retailing Services profitability and financial returns are strong with opportunity to deliver significant growth and returns for shareholders into the long term
  • Q&A
  • Appendix
  • The TPF Income Statement TPF Income Statement (31 December 2007) TPF Income Statement (31 December 2007) Net interest income Net interest income £m Total • Generated from TPF’s credit card, personal loan and savings portfolio Interest receivable 497 Interest payable (362) Net interest income 135 Non interest income Non interest income Non interest income 406 • Includes the commission from TPF’s general Non interest costs (17) insurance business (£143m net of costs) as well Total income 525 as fee and commission income from the banking and ATM businesses Administrative costs (197) Depreciation and amortisation (5) Total operating expenses (202) Operating profit before bad and doubtful debts 322 Bad debts Bad debts • TPF has high quality credit card and personal Bad debts (116) loans portfolios. For example TPF’s 3 month arrears rate for credit cards is just -0.4% of active balances –less than half the industry Operating profit before tax 206 average Source: TPF accounts, Tesco analysis
  • The TPF Balance Sheet Equity investments Equity investments • The £259m of equity investments represents TPF’s commitment to support TPF Balance Sheet (31 December 2007) TPF Balance Sheet (31 December 2007) the insurance underwriting activities carried out by RBS insurance £m Statutory Adjustment Pro-forma Assets Liquid assets Liquid assets Credit cards 1,885 - 1,885 Loans to customers 1,561 - 1,561 • The £420m represents additional liquid Equity investments 259 - 259 assets required by TPF as a stand alone business Back to back deposits (interest rate hedging) 4,047 (4,047) - Liquid assets - 420 420 Other 405 - 405 Interest rate hedging Interest rate hedging Total assets 8,156 (3,627) 4,529 • Within the JV, TPF hedges against interest rate fluctuations by taking out loans and Liabilities + equity depositing the funds with RBS. These loans Customer deposits (2,736) - (2,736) and deposits create matching assets and liabilities for TPF – which are shown in the Subordinated facilities (173) - (173) statutory balance sheet. As owners, we Back to back loans (interest rate hedging) (4,047) 4,047 - intend to use interest rate swaps instead – Secured wholesale funding (253) (420) (673) which is normal practice – removing this Other (390) (390) item from the balance sheet Total liabilities (7,598) 3,627 (3,971) Equity (558) - (558) Wholesale funding Wholesale funding Total (8,156) 3,627 (4,529) • In addition to customer deposits and equity, TPF will be financed using secured Source: TPF accounts, Tesco analysis wholesale funding – part of this is to cover the £420m liquidity buffer and the rest is to cover the £253m funding gap – which is, Note: Final positions on liquidity and capital are subject to agreement with the FSA broadly speaking, the difference between customer advances and customer deposits plus equity
  • The Tesco Balance Sheet Tesco Pro-forma Balance Sheet (23 February 2008) Tesco Pro-forma Balance Sheet (23 February 2008) £m Tesco Tesco (Adjusted for Tesco Consolidate Additional Impact of Eliminate JV re- 100% As Reported 100% TPF liquidity Consolidation structuring ownership of TPF) 23.02.08 31.12.07 23.02.08 Non-current assets Goodwill and other intangible assets 2,336 5 2,341 5 Property plant and equipment 19,787 19 19,806 19 Investment property 1,112 1,112 0 Investments in joint ventures and associates 305 (277) 28 (277) Other investments 4 259 263 259 Derivative financial instruments 216 216 0 Deferred tax assets 104 14 118 14 23,864 (277) 296 0 0 23,883 19 Current assets Loans and advance to customers 3,446 3,446 3,446 Loans and advances to banks 432 (429) 3 3 Inventories 2,430 2,430 0 Trade and other receivables 1,311 363 1,674 363 Derivative financial instruments 97 97 0 Current tax assets 6 6 0 Short term investments 360 420 780 420 Cash and cash equivalents 1,788 3,618 (3,618) 1,788 0 5,992 0 7,860 420 (4,047) 10,225 4,233 Non- current assets classified as held for sale as part of a disposal group 308 308 0 6,300 0 7,860 420 (4,047) 10,533 4,233 TOTAL ASSETS 30,164 (277) 8,156 420 (4,047) 34,416 4,252
  • The Tesco Balance Sheet (continued) Tesco Pro-forma Balance Sheet (23 February 2008) Tesco Pro-forma Balance Sheet (23 February 2008) £m Tesco Tesco (Adjusted for Tesco Consolidate Additional Impact of Eliminate JV re- 100% As Reported 100% TPF liquidity Consolidation structuring ownership of TPF) 23.02.08 31.12.07 23.02.08 Current liabilities Trade and other payables (7,277) (363) (7,640) (363) Financial liabilities - borrowings (2,084) (2,084) 0 - derivatives (443) (443) 0 Customer deposits (2,736) (2,736) (2,736) Deposits by banks (2,169) (420) 1,916 (673) (673) Current tax liabilities (455) (27) (482) (27) Provisions (4) (4) 0 Net current liabilities (10,263) 0 (5,294) (420) 1,916 (14,061) (3,798) Non-current liabilities Financial liabilities - borrowings (5,972) (173) (6,145) (173) - derivatives (322) (322) 0 Deposits by banks (2,131) 2,131 0 0 Post employment obligations (838) (838) 0 Other non-current liabilities (42) (42) 0 Deferred tax liabilities (802) (802) 0 Provisions (23) (23) 0 (7,999) 0 (2,304) 0 2,131 (8,172) (173) TOTAL LIABILITIES (18,262) 0 (7,598) (420) 4,047 (22,233) (3,971) Equity (11,902) 277 (558) (12,183) TOTAL EQUITY + LIABILITIES (30,164) 277 (8,156) (420) 4,047 (34,416) (3,971)