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Troubling Tesco

NEW YORK ( TheStreet) -- While visiting England recently, I was constantly going by Tesco (TSCDY) supermarkets.

They look just like American supermarkets, huge complexes in suburban locations surrounded by parking.Tesco is one of the companies accused of killing England's "high street," its traditional downtown filled with small shops and shopkeepers, and making the country into a clone of the U.S.

So you might think Tesco was a highly profitable outfit and a big international success. You would be wrong.

As proof, look no further than the sale of its California-based Fresh & Easy chain to private-equity manager Ron Burkle's Yucaipa Companies.

Tesco is basically paying Burkle to take this dog off its hands. In fact, it's handing over a loan of $126 million in preference to just firing the 4,000 employees in 150 stores and closing Fresh & Easy's headquarters in Riverside, Calif., which include offices and a distribution center.

That headquarters in Riverside are the security on the loan, and so the worst that happens is that Burkle closes it all and Tesco gets nothing. The best that can happen is that Burkle pays off the loan.

This is Tesco's third international retreat in two years. It slunk out of Japan last year and folded its Chinese unit into a state-run enterprise this year, becoming a minority partner.

Tesco still has annual revenue of about $100 billion, close to the numbers for Kroger (KR) and Costco (COST).

In a good year it can bring 5% of that to the bottom line, but fiscal 2013 ended in February was not a good year. Net income "before extraordinary items" was barely 2% of revenue, and after China and Japan were accounted for, profits were less than $250 million.

Tesco was founded by London grocer Jack Cohen, known as the "Slasher" for his attitude on prices, and brought to prominence by Terry Leahy, who won a knighthood for his efforts.

The current CEO, Phillip Clarke, is unlikely to win such plaudits. He has had to deal with a scandal involving horsemeat in the company's products, and a recent consumer survey in which Tesco was called the "worst" supermarket in the country. He even lost the driving license on his Jaguar.

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