Tesco to take £235m hit after reaching deal over accounting scandal
Supermarket giant Tesco will take a £235 million hit after reaching an agreement with authorities over its accounting scandal that will see it make a hefty compensation payout to investors.
The UK's biggest supermarket said its subsidiary - Tesco Stores - had entered a Deferred Prosecution Agreement (DPA) with the Serious Fraud Office (SFO), which could see it escape prosecution but pay a £129 million fine and costs.
The agreement, which will face court approval on April 10, came as Britain's financial watchdog concluded that Tesco had committed market abuse when it inflated profits by £263 million in a trading update on August 29 2014.
In an unprecedented move, the Financial Conduct Authority (FCA) said the supermarket chain would pay £85 million in compensation to investors who bought shares and bonds on - or after - August 29 and had held stock when the financial statement was corrected on September 22 2014.
Tesco suspended eight directors, and the SFO charged three former executives with fraud, after the black hole was discovered in the firm's accounts in 2014.
The scale of the problem was later revised from £263 million to £326 million, helping drag the Big Four grocer to a £6.4 billion loss in 2015, one of the largest in corporate history.
Dave Lewis, Tesco chief executive, said the firm was doing everything it could to "restore trust" after seeing the brand suffer following the accounting scandal.
He said: "What happened was a huge source of regret to all of us at Tesco, but we are a different business now.
"The decisions over the last years are evident to all and the job now is to keep this momentum.
"I am pleased with how our colleagues have responded and that has allowed us to rebuild the business since 2014.
"The brand was affected by the announcement back in 2014, that is clear.
"I think everyone will recognise that there is nothing here to proud of, but I am proud that we faced into it.
"The situation was real and I hope people will respect Tesco for facing a difficult situation and dealing with it in the manner in which it has."
If the DPA is approved by the Crown Court next month, Tesco will join blue-chip firms Rolls Royce and BAE Systems who both reached multimillion-pound settlements with the SFO following high-profile investigations.
However, the SFO said the agreement with Tesco Stores "does not address whether liability of any sort attaches to Tesco, or any employee, or agent of Tesco or Tesco Stores".
Focusing on compensation, the FCA said Tesco's share price was inflated when the firm reported inaccurate financial results to the market in 2014, meaning some investors paid a higher price.
It said these investors were entitled to claim compensation through the scheme and could receive a payout in line with the inflated price of stock.
Tesco is currently facing legal action from a group of 125 large investors who claim to have lost in excess of £100 million as a result of the accounting scandal.
FCA chief executive Andrew Bailey said: "Dissemination of information that gives a false or misleading impression as to traded securities harms the integrity of our markets.
"Tesco and its board are doing the right thing here, taking appropriate responsibility and agreeing to rectify the consequences of the misconduct."
The watchdog said it will take no further action against the supermarket chain, adding that it "does not suggest" Tesco's board "knew or could have reasonably have been expected to know" the 2014 trading update contained false or misleading information.
The penalty, compensation scheme and costs will lead to an exceptional charge of £235 million which will be booked in Tesco's annual results on April 12.
The agreements come as Tesco grapples with investor pressure over its £3.7 billion takeover tilt for food wholesaler Booker.
Major shareholders Schroders and Artisan Partners have written to the Tesco board demanding it scraps the tie-up after taking umbrage with the deal price and branding it an unwelcome distraction .
However, Mr Lewis pointed to shareholder confidence in Tesco, saying that the majority of its top 10 investors had increased their holding in the firm.
He said: "We listen to our shareholders and we have a long way to run. We see the growth opportunity of coming together with Booker. We are absolutely completely committed to the deal.
"I have engaged with both of (the shareholders) and will continue to do so.
"We offered both of them the opportunity to spend some time in the business to understand why we feel so strongly about it. One came and we spent six hours walking them through the deal and the other declined to come."
Shares in Tesco were up just shy of 1% in morning trading on the London Stock Exchange.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the settlements represented a "big slap on the wrist" for Tesco.
"Investors will be pleased that compensation is now going to be issued to those who bought shares in the supermarket at an inflated price, based on false information.
"This kind of accounting error is exceptionally rare in the UK stock market, nonetheless shareholders in all companies will be heartened to learn that in instances where false information is provided to the market, the regulator will see to it that investors are duly compensated.
"Dave Lewis underwent a baptism of fire when he took over as CEO in 2014, just as the accounting scandal struck.
"He and the supermarket will now be hoping to draw a line under the matter and concentrate on nurturing Tesco's nascent recovery."