Tesco

March 27, 2017 6:30 AM EDT

Tesco Plc is close to settling with prosecutors over its 2014 profit overstatement. The retailer could within weeks strike a deal with Britain’s Serious Fraud Office, according to Sky News, including a fine of more than 100 million pounds ($126 million).

That’s not insignificant. Tesco’s operating profit is expected to be about 1.2 billion pounds in this financial year, according to the Bloomberg consensus of analyst estimates. Still, 10 percent or so of forecast operating profit is manageable. And despite the recent traumas, Tesco remains Britain’s biggest supermarket, forecast to generate sales of 55.6 billion pounds in the year to February.

Profit Pummelled
Tesco’s operating profits have slumped but SFO fine would still be manageable
Source: Company Reports, Bloomberg Consensus 2017 is Bloomberg consensus. Prior to 2015 is trading profit

Even if the fine ends up bigger (it’s still subject to negotiation) it’s an acceptably small price to draw a line under the darkest chapter in Tesco’s near-100 year history.

Back in September 2014, Tesco said its first-half profit had been overstated by 250 million pounds because it overestimated the amount of money it received from suppliers. The revelation sparked a string of inquiries, a board refresh and changes in how the grocer operated. The SFO probe has been hanging over the company since.

The probable deal would take the form of a deferred prosecution agreement, which lets a company avoid prosecution in exchange for terms such as paying a fine and helping with individual prosecutions. It’s possible Tesco could be subject to ongoing monitoring. However, that management overhaul and the fundamental change to its processes — including how it deals with suppliers — means it may get away with a more or less clean break.

Tesco certainly needs this. Though in much better shape than during “year zero”, as chief executive Dave Lewis described 2014, the store chain isn’t yet off to the races. Sales growth slowed in the most recent four-week period, according to Kantar Worldpanel. German price-slashers Aldi and Lidl are still opening stores apace, while Wm Morrison Supermarkets Plc and Wal-Mart Stores Inc.’s British arm Asda are strengthening.

Then there’s the near 4 billion-pound acquisition of Booker Group Plc, announced by Lewis in January. That will probably involve a lengthy competition inquiry and, if it clears that, a significant integration effort. Tesco shares rose after the Booker deal was announced, but have slipped in recent weeks.

The shares barely reacted to the SFO story on Monday. The stock has performed worse than the FTSE 100 over the past year, but is still priced at almost 19 times forward earnings, according to Bloomberg data. Investors are pinning hopes on a smooth absorption of Booker — and some of its retailing nous. Closing the door on one of the final remnants of the 2014 crisis means Lewis can at least give his full attention.

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