Tesco is worth less than its debts

Yesterday, Dave Lewis, chief executive of the British grocery chain Tesco, said he isn't working on a rights offering to boost the company's equity base. But his follow-on comment -- "you never say never" -- is the one investors should focus on, because the collapse in the company's share price means it's now worth less than it owes its creditors in the bond market.

Tesco’s fall from grace has been spectacular: The company is now worth less than half what it was a year ago.

Today’s share price of about 168 pence values the company at roughly £13.65 billion. But Tesco owes its bondholders a bit more than £13.95 billion, according to data compiled by Bloomberg. Excluding banks, it’s the only member of the FT-SE 100 Index of the biggest UK companies with that uncomfortable debt-to-equity ratio.

WM Morrison Supermarkets, in comparison, is worth £3.57 billion, and has bonds outstanding worth £2.05 billion. J Sainsbury's market value of £4.5 billion compares with bond market debts of just £733 million.

Tesco’s financial situation only seems to get worse. It reported a 41 per cent collapse in first-half profit yesterday, and its chairman has quit after a black hole in its accounts -- opened when the company booked revenues too early and costs too late -- turned out to be £13 million pounds than the £250 million initially estimated. Eight executives have been suspended, and the company is now being investigated by the UK Financial Reporting Council.

It’s hard to see how Tesco can avoid passing the begging bowl to its investors by launching a rights issue. It’s also hard to know whether the share price has fallen almost 14 per cent in the past month because investors expect such a move.

If he does plan to raise capital, however, Lewis will have to move soon. Yesterday, Moody’s cut Tesco’s credit rating to Baa3, and left it on review for a further downgrade; one more drop would remove the company’s investment-grade status. Raising equity when your market share is shrinking and you’re being investigated for fraud isn’t easy; selling stock when you’ve been downgraded to junk will be even tougher.

Bloomberg