Tesco signs $118m deal to buy Kipa of Turkey

Tesco came a step closer to breaking into the Turkish supermarket sector yesterday after the UK retail giant signed a deal to acquire a small but strategically placed chain.

Tesco said it had reached an agreement to acquire Kipa, a food retailer with five hypermarkets on the Aegean coast. The move forms part of the British group's strategy of building a presence in developing markets.

Tesco will initially acquire 85 per cent of Kipa's A shares, according to the Turkish group. The UK supermarket chain said it would pay up to a maximum of $118m (£75m at current exchange rates) for Kipa's "entire equity capital", subject to a net cash adjustment.

But shares in Kipa plunged, dragging the Turkish stock market in its wake on concerns in Turkey that the deal may value Kipa at below the current share price.

Tesco, which first revealed it was in talks with Kipa last summer, said it had signed a "conditional contract". It added: "The agreement is subject to a number of material conditions. If these conditions are satisfied closing of the deal is expected to be later in the current financial year."

A stream of announcements have trickled out about Tesco's progress over the past eight months because strict Turkish takeover rules state that the market must be kept fully informed of any developments.

Kipa's five stores are located in and around Izmir, Turkey's third-largest city. The chain employs more than 1,000 people and made a profit of 5,900bn Turkish lira (about £2.3m) in the first nine months of 2002. Kipa – or Kipa Kitle Pazarlama Ticaret in full – also operates a number of BP and Total service stations in Turkey.

Analysts said Tesco's slow but steady progress was customary of its thorough approach to expanding overseas. The UK group has been sniffing around opportunities in the Chinese market for months. Closer to home, Tesco is one of five bidders vying for control of Safeway, the fourth-biggest British supermarket chain.

Philip Dorgan, a food retail analyst at WestLB Panmure, said acquiring Kipa was "part of a developing market strategy rather than a huge move". He added: "Half of Tesco's selling area is overseas and only 15 per cent of its profit is, so the overseas market is key to growth in the future."

Tesco has focused its developing market attention on central Europe and Asia. It has outlets in Thailand, South Korea, Taiwan, and recently moved into Poland. The group tends to rebrand most of the stores it acquires overseas under the Tesco banner, although a spokesman said no decision had been made yet whether to rename the Kipa units.

Speaking at the group's annual results briefing last week, Sir Terry Leahy, the chief executive, said he saw more potential for growth in the UK now than 10 years ago. The group reported full-year profits up 13 per cent at £1.3bn.