Bidders Cut Valuation Of £1bn Tesco Clubcard

Prospective bidders for the Tesco (Xetra: 852647 - news) unit which manages its Clubcard operation are poised to slash the value of their offers following the restructuring of one of its largest contracts.

Sky News has learnt that private equity groups which have expressed an interest in acquiring Dunnhumby began holding meetings with Britain's biggest retailer last week - and have since cut their projected valuations of the company from £2bn to around half that sum.

Bidders are understood to have been informed that a renegotiation of Dunnhumby's relationship with Kroger, the US retailer, meant that the profitability of the business that is being marketed for sale is now substantially lower.

Some sources said that pre-tax profits had halved to approximately £70m as a consequence of the restructured contract, while others suggested that the fall was meaningful but not as steep as a 50% decline.

Tesco declined to comment on the profitability numbers or the wider process, citing commercial confidentiality, although one insider said the £70m figure was "in the right ballpark".

The retailer, which is rebuilding in the wake of a £6.4bn annual loss for last year - one of the biggest in UK corporate history - has signalled to bidders that it is prepared to sell its entire interest in Dunnhumby, sources said on Monday.

Dave Lewis, Tesco's chief executive, said in January that it would examine all options for the division.

Tesco issued a statement in April announcing that it had altered the division's relationship with Kroger but did not disclose the impact on Dunnhumby's profitability.

It said that Dunnhumby, which has offices in 29 countries, had "opened the way to work with other North American retailers and FMCG (fast-moving consumer goods) clients following a restructuring of its relationship with The Kroger Co (NYSE: KR - news) ".

The statement added: "Dunnhumby and Kroger will replace the existing exclusive joint venture with more flexible long-term license and service agreements."

The Tesco insider said that the potential uplift to Dunnhumby's future earnings from the opportunity to work with other US clients would also have to be taken into account by prospective buyers.

However, a source close to one bidder said that buyers were likely to submit their bids on the profit figures disclosed to them, and that a multiple of 15 times the £70m figure was "a reasonable basis" for calculating Dunnhumby's valuation.

Goldman Sachs (NYSE: GS-PB - news) , which is running the auction, has been approached by dozens of parties, although a number of questions relating to issues such as exclusivity in other markets remain.

Prospective buyers include WPP Group, which is working with the buyout firm General Atlantic Partners, and other private equity firms such as TPG Capital and Clayton Dubilier & Rice, where the former Tesco chief executive Sir Terry Leahy is a partner.

Dunnhumby was a crucial architect of Tesco's Clubcard scheme and the role it played in catapulting the supermarket chain into a market-leading position in the UK during the 1990s.

After Tesco took full control of the business in 2004, Dunnhumby expanded rapidly, signing up retailers around the world as clients and now counting companies such as Coca-Cola, Procter & Gamble and Shell (LSE: RDSB.L - news) as customers.

Dunnhumby was founded by Edwina Dunn and Clive Humby, a husband-and-wife team now regarded as having created one of the UK's most successful business start-ups of the last 25 years.

Last year, Dunnhumby bought Sociomantic Labs, an advertising technology firm, for a price reported to be in the region of $200m.