UPDATE 1-Valero may raise over $3.5 bln in retail sale -sources

* Retail may fetch 8-10 times $450 mln EBITDA -sources

* Convenience chains, private equity interested -sources

* Unclear if U.S., Canada stores would be sold as a whole

By Soyoung Kim and Olivia Oran and Greg Roumeliotis

NEW YORK, Sept 27 (Reuters) - Valero Energy Corp is selling its retail business through an auction that could fetch more than $3.5 billion and has lured the interest of private equity firms and convenience-store operators, people familiar with the matter said.

The retail business, which operates gas stations and convenience stores and consists of nearly 1,000 U.S. stores and some 775 units in Canada, has around $450 million in annual earnings before interest, tax, depreciation and amortization (EBITDA) and could sell for 8-10 times EBITDA, the people said.

The U.S. refining company said in July it would split off its gas station and convenience stores, and cited a tax-free spinoff to shareholders as one option.

Since then, a number of parties have expressed interest in potentially acquiring the business, leading the company to explore a sale, the people said.

Valero, which is being advised by Credit Suisse Group on the retail split, has sent financial information about the unit to interested parties and is expected to receive initial offers in October, according to two of the people.

The people asked not to be named because the sale process is not public. Credit Suisse declined to comment.

"We have said we are looking for a tax-efficient method to unlock the value that is in our retail business," Valero spokesman Bill Day said on Thursday. He declined to comment on the sale process.

BROAD INTEREST

A diverse group of strategic buyers that have footprints in convenient stores, grocery stores and real estate, as well as major private equity firms, are expected to participate in the process, according to the people familiar with the matter.

Large convenience-store chains such as 7-Eleven, Casey's General Stores Inc and Alimentation Couche-Tard Inc would likely have some interest, the people said.

Carlyle Group LP and TPG Capital LP are also among the buyout firms that are taking an initial look, one of the people said.

Earlier this year, Carlyle agreed to invest in Sunoco Inc's Philadelphia refinery, giving it a strategic vantage point on Valero's retail assets.

TPG and Carlyle declined to comment, while representatives for Couche-Tard and Casey's General Stores did not immediately respond to requests for comment.

A spokeswoman for 7-Eleven said the company is "aware of Valero's interest in selling its retail business", but declined to comment further.

The auction is at a very early stage, and it remains unclear if the U.S. and Canadian operations would be sold as a whole or separately, the people said.

The retail split would allow Valero to focus on its core refining business. It could also generate additional shareholder value since retail businesses similar to Valero's trade at higher valuations than refining companies.

Retail units are typically viewed as an outlet for fuels produced at a company's refineries. Such stores allow refiners to keep utilization rates up even when demand slows, a situation that puts them at an advantage to competitors without stores.

Shares of Valero rose 1.7 percent at $31.44 on the New York Stock Exchange on Thursday.