JULY 28, 2008
TESCO TAKES FULL OWNERSHIP OF TESCO
PERSONAL FINANCE AND TARGETS £1 BILLION
FROM RETAILING SERVICES
Tesco PLC (“Tesco”) today announces that it has reached an agreement with
The Royal Bank of Scotland plc (“RBS”) to buy from RBS its 50%
shareholding in Tesco Personal Finance Group Limited (“TPF”) for a cash
consideration of £950 million (the “Acquisition”).
The Acquisition will enable Tesco over time to extend its financial services
business from a collection of popular financial products to that of a full service
retail bank offering more choice, innovation and value to customers, and
better returns to shareholders.
The Acquisition is part of the strategy by Tesco, Britain’s largest retailer, to
grow its share in fast growing services markets including financial services,
telecoms and internet/home shopping.
Tesco believes such services could deliver £1 billion in profits per annum –
more than double current levels of just under £400m.
Tesco CEO Sir Terry Leahy, commented:
“Services are bigger and faster-growing markets than food. As consumers
look to make every pound work harder, it is a good time for Tesco to expand
“Tesco’s clear strategy, set out a little over 10 years ago, has created new
service businesses attracting around seven million customers. We have
become a trusted supplier of innovative products and services offering great
value and I believe Tesco’s special relationship with consumers will enable
TPF, as a wholly owned subsidiary of Tesco, to move its business to the next
“With a renewed focus on growth in the UK and internationally we can unlock
the true potential of Tesco’s retailing services.”
Tesco has exciting plans for the future development of TPF, which will include
an increased presence in Tesco’s traditional stores, a wider range of savings
products and, possibly in the future, a current account product.
In addition, TPF will continue to receive services from RBS under various
Commercial Services Agreements.
Tesco’s Finance and Strategy Director, Andrew Higginson, will assume a new
Tesco Board position as Chief Executive of Retailing Services. Higginson will
lead a strengthened services team including a new CEO and Finance director
for TPF and a new CEO for Tesco Telecoms. He will retain his responsibilities
for Tesco Group strategy but will relinquish his role as Finance Director of
Tesco once a suitable successor has been put in place.
Tesco is delighted to have recruited Benny Higgins, a leading figure in the
banking industry, to run the new wholly-owned TPF business. Higgins brings
huge experience having run the retail banking divisions of both RBS and
HBOS. Iain Clink, a former TPF CEO and until recently Head of Cards and
Direct Finance at RBS, will join TPF as Finance Director.
Tesco Telecoms will be led by a new CEO, Lance Batchelor, who joined
Tesco a year ago as UK Marketing Director. Batchelor was previously UK
Marketing and Commercial Director at Vodafone for four years.
Tesco.com CEO Laura Wade-Gery will continue to run the world’s biggest on-
line grocery store and the successful Tesco Direct non-food business.
FURTHER INFORMATION ON THE ACQUISITION OF RBS’s INTEREST IN
The approval of the Financial Services Authority (FSA) is a condition of the
Acquisition and initial discussions have taken place. The Acquisition is
expected to close in the final quarter of calendar 2008.
Rationale for the Acquisition:
The TPF joint venture structure was an ideal way for Tesco to enter the
financial services market 11 years ago. RBS has been a good partner and
Tesco has learned a lot from them about how to manage a financial services
However, TPF has now reached a size where only sole ownership can unlock
the potential growth Tesco wants to see from the TPF business in the future.
Discussions on how to achieve this began last year and Tesco concluded that
it was important for TPF to grow as part of the Tesco Group.
UK retail financial services are diverse, fast growing and attractive markets.
Today, TPF serves only a proportion of these markets, with its presence in
insurance, credit cards, personal lending and most recently on-line insurance
comparison through Tesco Compare. Customers are becoming more
demanding and they are increasingly prepared to switch provider to get the
products and service levels that they want. As a result, Tesco believes that
retail financial services remain a significant growth opportunity which TPF can
better address as a wholly-owned subsidiary of Tesco.
The UK financial services profit pool 1 is estimated to be worth at least £20bn
per annum and TPF’s current product offer has material market positions in
only two of these core categories (car insurance (4.3%) and credit cards
(6.9%)). While TPF’s current offer addresses other areas, it currently has less
meaningful market positions (e.g. home insurance (2.0%) and savings (0.8%))
and there is a considerable opportunity for our innovative and customer
focused offer both to build share in existing categories and to enter new
Tesco believes that its proven ability to innovate and focus on delivering
better value to customers will attract a greater share of consumer spending on
retail financial services and deliver strong returns for shareholders.
The deal both creates value for shareholders and will be earnings accretive
from the year of acquisition.
Background on TPF:
TPF was founded in 1997 as a joint venture between Tesco and RBS to
market a range of financial services products under the Tesco brand through
Tesco’s store network. From the outset, TPF has appealed to customers by
offering them access to good value, straightforward ranges of uncomplicated
financial services products in a convenient and familiar selling environment.
TPF has grown rapidly over the last 10 years with profit before tax reaching
£206 million last year. TPF’s profits for the current year are expected to be
over £240 million.
Today TPF’s principal activities are:
• general insurance – motor, home, pet and travel;
• credit cards and personal loans;
• personal saving products;
• on-line insurance comparison (Tesco Compare); and
• a network of cash machines (ATMs)
Tesco sells its products through multiple channels including in-store (e.g.
through promotional materials), by telephone and online. Approximately 60%
UK financial profit pool defined as UK profits before tax derived from operations in retail
provision of general insurance, mortgages, personal loans and credit cards, current accounts,
savings, SME banking and payment protection insurance.
of new sales of TPF’s financial products come through the online channel – a
further benefit of grouping it more closely with Tesco.com.
While the bulk of TPF’s activities are focused on the UK, it also offers a
selection of financial services products (including credit cards and insurance
products) in certain other countries in which Tesco has a presence, namely
Ireland, Hungary and Poland.
TPF’s product range:
TPF has over 5 million customer accounts. Its key product areas are:
Insurance – In total, consumers hold approximately 2.7 million insurance
policies with TPF, and insurance represented over 60% of TPF’s 2007 profit
before tax. TPF is one of the leading providers of motor insurance in the UK
with a share of 4.3%. In addition, TPF offers breakdown recovery, home, pet,
travel and other personal insurance products. TPF also operates a leading
insurance comparison portal, Tesco Compare, which it launched in 2007 and
has proved very popular with customers. Tesco Compare was rated “Best car
insurance comparison site to the customer” for two successive years by
independent financial product research company Defaqto.
Personal banking – TPF offers a range of simple products focused around
the Tesco credit card, where TPF has built a 6.9% share. TPF currently has
total credit card receivables of £1.9 billion and 1.3 million active accounts.
TPF has a high quality and low risk credit card book resulting from the quality
of its customer base, a high proportion of who are loyal Tesco customers and,
experience shows, are a lower credit risk. This is evidenced by the low level of
credit card arrears, with just 0.4% of balances that are three months in
TPF also has a £1.6 billion loan book with approximately 210,000 personal
loan customers. TPF’s personal lending activities are relatively small and are
largely funded by customer deposits (see below), with minimal reliance on
TPF has approximately 390,000 savings account customers and total savings
balances of £2.7 billion.
ATMs – TPF has over 2,700 ATMs situated across the Tesco store portfolio
and serves over 25 million transactions per month. TPF’s ATM business
produces high-quality and reliable earnings that are continuing to grow due to
the high footfall resulting from their convenient locations within Tesco stores.
TPF’s focus on retail banking and absence from corporate lending and
mortgages mean it is not exposed to some of the difficulties currently being
experienced by many banks.
Governance, management and employees:
TPF will have its own governance structure enabling it to meet fully the
requirements of the Financial Services Authority. Although Tesco will stand
behind TPF and its liabilities a new TPF Board will be appointed allowing TPF
to act independently in the bank’s best interests. The new TPF Board will
consist of the following members:
Andrew Higginson, Finance and Strategy Director and now CEO of
Retailing Services at Tesco, will remain as Chairman of TPF. Higginson
will step down as Tesco’s Finance Director when a replacement has been
two Executive Directors, the newly appointed TPF CEO and Finance
at least two independent Non-executive Directors with significant
experience in banking and insurance. TPF has already appointed Graham
Pimlott, former Director of Group Planning, Operations and Technology at
Barclays Bank plc. Pimlott, a former Tesco Non-executive Director, was
also Chairman and CEO of Barclay’s Asian operations and before that, the
head of investment banking at BZW. Pimlott has agreed to chair TPF’s
audit committee; and
other Non-Executive Directors some of who will be from within Tesco.
Tesco recognises that TPF needs senior leaders with specialist banking and
financial services management and skills. As a result, Tesco has recruited
Benny Higgins to be the new CEO to lead TPF in its future evolution as a
wholly owned subsidiary of Tesco. Higgins has significant industry experience
including within TPF, where he was a non-executive director from 1998 until
2006. He was also Head of Retail Banking at RBS from 1997 until 2006 and
worked at Halifax Bank of Scotland Group as Chief Executive of Retail
Banking until August 2007. In addition, Tesco has appointed Iain Clink to
serve as TPF’s Finance Director. Clink joins TPF from RBS, where he was
until recently Head of Cards and Direct Finance. He was CEO of TPF
between 1999 and 2004.
TPF’s current CEO and Finance Director will remain in place for a transitional
period and other management appointments will be made in the coming
It is anticipated that the approximately 200 dedicated TPF head office
employees, including Tesco Compare, who are currently employed by RBS
will transfer with the business and be employed by Tesco. TPF’s head office
will remain in Edinburgh. The RBS staff who perform services for TPF will
continue to be employed by RBS and will continue to provide these services
as set out under the Commercial Services Agreements.
Further details of the Acquisition:
Tesco is acquiring RBS’s current 50% shareholding in TPF for a cash
consideration of £950 million, payable in full upon completion of the
Acquisition (“Completion”). Tesco will also acquire subordinated shareholder
loans held by RBS at their market value of approximately £100 million.
Tesco will fund the cash consideration for the Acquisition and the funding
requirement to finance TPF's normal operations from existing debt facilities
and, subject to market conditions, in the debt capital markets.
Tesco and RBS have agreed the terms of various commercial services
agreements (“CSAs”) covering general insurance, life insurance, ATMs,
banking and Tesco Compare under which RBS will commit to continue to
provide services to TPF at agreed cost and service levels for periods of
between two and seven years. The services to be provided under the CSAs
will include, amongst others, the operation of customer contact centres,
account establishment and management, card issuance, back-office
processing, and collections and recoveries.
TPF’s general insurance business is currently underwritten by UK Insurance
Ltd (“UKI”), a wholly-owned subsidiary of RBS Insurance Limited (“RBSI”),
itself a wholly owned subsidiary of RBS. RBSI and UKI have committed to
provide general insurance related services under an insurance distribution
agreement to TPF for a three-year period.
Under the terms of the general insurance distribution agreement TPF will
continue to supply the approximately £260 million of capital already invested
to support insurance underwriting activities in relation to the TPF insurance
book, and UKI will provide a full range of services at agreed cost and service
level to TPF including operation of customer contact centres, insurance
quoting and policy issuance, underwriting and claims management. All profits
from general insurance distribution, underwriting and investment activities will
be paid to TPF.
If RBS sells its insurance business, or any part of its insurance business
(including RBS or UKI), the obligation to supply insurance services to TPF on
the terms set out above will be protected.
Further financial details:
In the year to 31 December 2007, TPF had profits before tax of £206 million.
On a pro forma basis TPF’s balance sheet comprised approximately £4.5
billion of assets, largely made up of loans and advances to customers, and
approximately £4.0 billion of liabilities, of which £2.7 billion were customer
deposits and £0.7 billion secured wholesale borrowing. The net assets of the
business were approximately £560 million.
At 31 December 2007, TPF had gross assets of £8,156 million, a significant
proportion of which was in the form of back-to-back intra-group loans for
funding purposes between TPF and RBS.
Upon Completion, TPF’s assets and liabilities will be fully consolidated into
Tesco’s balance sheet. It is Tesco’s intention to give additional financial
disclosure in relation to TPF to aid analysis of the Tesco Group’s financial
position and performance. There are two main elements to this: Tesco will
separately report TPF’s revenue and operating profit and it will disclose the
balance sheet of TPF separately from that of the retailing operations of Tesco.
A video interview with Andrew Higginson is available to view at
Investor Relations: Media:
Steve Webb Trevor Datson
01992 644800 01992 644645
Greenhill & Co.: JPMorgan Cazenove: Maitland Consultancy:
Simon Borrows John Muncey Angus Maitland
David Wyles Luke Bordewich 0207 379 5151
020 7198 7400 020 7588 2828
This announcement is for information purposes only and does not constitute an offer or an
invitation to acquire or dispose of any securities or investment advice in any jurisdiction.
Greenhill & Co. International LLP, which is authorised and regulated in the United Kingdom by
the Financial Services Authority, is acting for Tesco and for no-one else in connection with the
Acquisition or the contents of this announcement and will not be responsible to anyone other
than Tesco for providing the protections afforded to clients of Greenhill & Co. International
LLP, or for providing advice in relation to the Acquisition or the contents of this
JPMorgan Cazenove Limited, which is authorised and regulated in the United Kingdom by the
Financial Services Authority, is acting for Tesco and for no-one else in connection with the
Acquisition or the contents of this announcement and will not be responsible to anyone other
than Tesco for providing the protections afforded to clients of JPMorgan Cazenove Limited, or
for providing advice in relation to the Acquisition or the contents of this announcement.
It is possible that this announcement could or may contain forward-looking statements that
are based on current expectations or beliefs, as well as assumptions about future events.
These forward-looking statements can be identified by the fact that they do not relate only to
historical or current facts. Forward-looking statements often use words such as anticipate,
target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could or other
words of similar meaning. Reliance should not be placed on any such statements because, by
their very nature, they are subject to known and unknown risks and uncertainties and can be
affected by other factors that could cause actual results, performance or events, and Tesco’s
plans and objectives, to differ materially from those expressed or implied in the forward-
There are several factors which could cause actual results to differ materially from those
expressed or implied in forward-looking statements. Among the factors that could cause
actual results to differ materially from those described in the forward-looking statements are
delays in obtaining, or adverse conditions contained in, regulatory approvals, changes in
economic conditions, competition and industry restructuring, changes in interest or tax rates,
changes in energy market prices, changes in laws, regulations or regulatory policies,
developments in legal or public policy doctrines, currency fluctuations, technological
developments, the failure to retain key management, or the availability, key timing and
success of future acquisition opportunities. Each forward-looking statement speaks only as of
the date of the particular statement.
Tesco undertakes no obligation to revise or update any forward-looking statement contained
within this announcement, regardless of whether those statements are affected as a result of
new information, future events or otherwise, save as required by the listing rules of the United
Kingdom Listing Authority, the rules of the London Stock Exchange or by law.