Google Enters Fray For Tesco Loyalty Unit

The technology giant Google (Xetra: A0B7FY - news) is drawing up secret plans to gatecrash the auction of Tesco’s customer loyalty arm by exploring a joint takeover bid with one of the UK’s biggest buyout firms.

Sky News has learnt that Google is in talks with Permira about making a combined offer for Dunnhumby, the sale of which Tesco (Xetra: 852647 - news) hopes will help to rebuild its battered balance sheet.

It was unclear on Thursday whether Google’s interest was being handled through its main corporate entity or through another unit such as Google Capital, a growth equity fund backed by the US-based company.

Either way, Google’s association with the auction is likely to add renewed competitive tension to a process which was perceived to have become less attractive to prospective buyers following the restructuring of an arrangement between Dunnhumby and Kroger, its US partner.

Permira’s Silicon Valley-based team has worked with Google before, notably on their joint ownership of Renaissance Learning, an assessment and educational analytics business which has a presence in thousands of American schools.

It is unclear what commercial arrangements Google and Permira would strike in relation to the ownership of Dunnhumby if their bid progresses and is ultimately successful.

One source suggested that Google was likely to be interested in exploring and adopting some of the data analysis capabilities which helped Dunnhumby become one of the world’s leading operators of customer loyalty programmes.

The US giant, which is facing regulatory pressure in Europe and elsewhere on its core search business, is only one of a number of big players in the marketing and technology industries which are keen to get their hands on Dunnhumby.

WPP Group, the marketing services company headed by Sir Martin Sorrell, has teamed up with General Atlantic Partners to mount a joint bid.

Other big names with an interest in the auction include John Browett, a former Tesco executive who has been talking to Apax Partners, another buyout firm, about buying Dunnhumby.

The data unit’s value was originally mooted to be in the region of £2bn, but some bankers say the business is worth substantially less than half that sum .

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 that it is prepared to sell its entire interest in Dunnhumby.

Dave Lewis, Tesco's chief executive, is also exploring the sale of its Korean retail operations as he attempts to get Tesco back into shape.

The company issued a statement in April saying 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) ".

A Tesco insider said that the uplift to Dunnhumby's potential earnings from the opportunity to work with other US clients would have to be taken into account by prospective buyers, although some countered that the cost of buying in-store media rights could depress future margins.

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.

Permira and Google declined to comment.