London, July 28 - Tesco, Britain's biggest retailer, announced a major push into banking and other services with a 950 million pound ($1.9 billion) deal to buy out Royal Bank of Scotland from their finance joint venture.
Tesco said on Monday it planned to set up a full-service retail bank which, along with other services like telecoms and internet/home shopping, it hopes will make annual profits of 1 billion pounds in a few years, up from under 400 million now.
It is the latest sign of the retailer's determination to branch out of its core British grocery market, which it dominates with a market share of over 30 percent. Tesco is already a major force in DVDs, books and clothes, and has also expanded abroad, recently opening stores in the United States.
Andrew Higginson, Tesco's finance and strategy director, will become chief executive of retailing services and will step down as finance director once a successor is in place.
"It says something of their ambition," said BlueOar Securities analyst Greg Lawless of the 1-billion-pound profit target, which compares with the group's total profit before tax of 2.8 billion pounds in the year ended Feb. 23.
"And the fact he's (Higginson) willing to relinquish the CFO's job to drive this business shows it can be a pretty material part of Tesco going forward."
The deal is also a boost to Royal Bank of Scotland's (RBS) faltering plans to sell assets to bolster its balance sheet. RBS said it expected to make a 500 million pound profit on the sale of its 50 percent stake in Tesco Personal Finance (TPF).
One analyst, who declined to be named, noted that Tesco's net debt could, as a result of this deal and its $1.9 billion purchase of stores in South Korea announced in May, rise to about 9 billion pounds.
"These are sensible, opportunistic acquisitions. But 9 billion pounds is a big number," the analyst said.
At 1520 GMT Tesco shares were down 0.4 percent at 375.5 pence, broadly in line with the FTSE-100 index of leading UK companies. RBS was down 3.6 percent at 207.25 pence amid a generally weak banking sector.
BIGGER THAN FOOD
"Services are bigger and faster-growing markets than food," Tesco Chief Executive Terry Leahy said in a statement. "As consumers look to make every pound work harder it is a good time for Tesco to expand its presence."
TPF celebrated its 10th anniversary last year, when it made a profit of 206 million pounds and had 5.2 million customers for products including insurance, credit cards, loans and savings.
Tesco said it planned to give the business a bigger presence in its stores, introduce a wider range of savings products and, possibly in future, provide current accounts.
Benny Higgins, a former executive at RBS and HBOS, will run TPF, Tesco said, while Lance Batchelor, formerly UK Marketing and Commercial Director at mobile mobile phone group Vodafone, will head up Tesco Telecoms.
Higginson, who will remain as strategy director, told reporters he was confident of obtaining approval from the UK's financial services regulator to operate as a bank. The deal with RBS is expected to close in the final quarter of 2008.
Tesco had set aside "a couple of hundred million" pounds for IT investment in the business and would continue to use RBS's platforms for a number of years until Tesco has developed its own, he said on a conference call.