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Tesco deal shows that bottom fishing could begin in Thailand

  • Thailand's CP Group has announced the largest M&A deal in 2020 with its US$10 billion takeover of Tesco Thailand

  • The deal comes on the heels of a 20% YTD drop in Thailand's SET index, but investors need to be alert to its merits

  • Thai corporates enjoy a developed market cost of capital in an EM setting, which suggests more deals could occur

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
10 March 2020
Published byTellimer Research

Equity analysts are given to namedropping. I am no exception. I recently ran into the former Thai Prime Minister Thakshin Shinawatra in a Dubai coffee shop. Mr Thakshin is in self-imposed exile after being ousted by a coup.

Despite being accosted by a complete stranger, he greeted me with complete courtesy. He seemed sanguine about his country's prospects.

He would be shocked that Thailand would soon be engulfed in a tsunami of selling due to the virus. The Stock Exchange of Thailand (SET) is the worst performer in Asia in 2020, down 20% YTD. The consumer sector, which represents over a fifth of the index, is down almost a quarter. Tourist arrivals fell 44% in February.

CPF and CPALL outperforming Thai stock exchange ytd

Source: Bloomberg

Despite, the carnage, Thailand yesterday announced the world's largest M&A deal so far this year. Tesco PLC, the UK's largest retailer, has sold its grocery business for US$10.6 billion to Thai conglomerate CP Group. Tesco is disposing of this asset to focus on its home market.

CP Group, on the other hand, is emerging as Asia's consumer giant. The CP Group is controlled by Mr Dhanin Chearavanont. It controls CPF TB (Buy, TP THB38.0), Asia's largest meat player, and CP ALL (Not Rated), Thailand's 7-Eleven operator.

CPF TB and its associate CPALL TB will buy 50% of Tesco Thailand for US$3 billion each. The remainder will be held by an unlisted CP Group entity.

Three implications

The deal, which is subject to regulatory approval, has three implications at a time of intense market anxiety:

(1) Retailing can be a safe haven in the sell-off. People still need to eat and drink, even in a pandemic. Tesco's valuation is 2.1x P/B for a company that has had an average ROE of 7%. On EV/EBITDA the deal is valued at 12.5 EV/EBITDA. Though this is a premium to Thai retailers, it is reasonable for a grocer with a vice-like grip on the Thai market. There are potential synergy benefits with CPALL TB, which has seen same-store sales growth (SSSG) average 7% in the past three years. 

(2) CP Group is now at the pinnacle of the ASEAN consumer food chain. The scale and scope of its operations suggest that CPF TB and CPALL TB could enjoy above-market operating margins in FY20-22. There is the added advantage that CP Group is acquiring 70 Tesco outlets in prime real estate locations. It is as much a bet on property as a play on consumer growth.

(3) Thai consumer companies may be on an acquisition trail, as the country has a low cost of capital. Thailand is an emerging-market country with a developed-market cost of capital. Its 10-year risk-free rate is below 2%. Corporates like CPF TB and THBEV SP can borrow at similar rates to a US corporate. This provides the Thai consumer stocks with a massive advantage in a region where the cost of capital can be in double digits. We should watch out for Thai consumer giants acquiring assets in Vietnam, Indonesia, and Philippines.


The exiled leader Thakshin is credited with boosting the incomes of Thailand's poor. His party's rice subsidy boosted rural consumption in Thailand. The virus is a body blow to Thailand's consumer sector, but investors should be alert to opportunities that his policies may have created.