UPDATE 2-Aeon, China Resources eye bids for Li's Hong Kong supermarkets-sources

Thu Jul 25, 2013 1:51am EDT

* Hutchison sets Aug 16 deadline for first round bids

* ParknShop has 33 pct market share in Hong Kong

* Auction seen drawing interest from private equity firms

* Li's plans to focus on health, beauty retail after exiting supermarkets (Adds Aeon comment)

By Denny Thomas and Saeed Azhar

HONG KONG/SINGAPORE, July 25 (Reuters) - Japan's Aeon Co Ltd and state-owned China Resources Enterprise Ltd are among the suitors considering bids for the Hong Kong supermarket business being sold by billionaire Li Ka-shing, people familiar with the matter told Reuters.

Li's Hutchison Whampoa Ltd conglomerate has set an Aug. 16 deadline for initial bids for the business, with an asking price of up to $4 billion, said the people, who declined to be identified because the sale process is confidential.

The auction is generating interest from companies and private equity firms, lured by the opportunity to operate in a market that is dominated by two large players. Octogenarian Li is planning to sell the business to focus more on Hutchison's health and beauty retail operations, which have a bigger global footprint and offer higher margins compared with the supermarket business, the people said.

Australian retailers Woolworths Ltd and Wesfarmers Ltd and China's Sun Art Retail Group Ltd are among the other suitors evaluating bids, the people added.

"Hong Kong is a saturated market and we can only expect very stable or even flat growth in the supermarket business, which may not be attractive to investors seeking speedy returns," said Linus Yip, chief strategist at First Shanghai Securities.

"But foreign operators may find it appealing if they want to tap the China market through ParknShop as a stepping stone."

Li's ParknShop and Singapore's Dairy Farm International Ltd dominate Hong Kong's supermarket business. ParknShop Has a 33.1 percent share and Dairy Farm has 39.8 percent, according to London-based Euromonitor. China Resources' Vanguard Supermarket has a 7.8 percent market share.

ParknShop, which operates 345 stores in Hong Kong, mainland China and Macau, earned HK$21.7 billion ($2.8 billion) in revenue last year, according to the statement issued by Hutchison. About 270 of the stores are in located in Hong Kong.

Thailand's CP All Pcl has decided not to bid for the business with Hong Kong's high real estate prices seen as a sticking point, one person with direct knowledge of the matter said. CP All, controlled by Thai billionaire Dhanin Chearavanont, plans to use its recently acquired Siam Makro Pcl business to expand overseas, the person added.

China Resources, Sun Art and Wesfarmers declined to comment. Woolworths and CP All were not available for immediate comment. A spokesman for Aeon denied that it would participate in the bidding.

Like in any auction process, suitors may decide not to place formal bids even at the last minute.

Hutchison declined to comment on the process. Last week, the company said it was conducting a strategic review of its supermarket retail business to optimise value for shareholders.

MATURE MARKET

Companies with existing China operations would be able to extract more synergies from the acquisition, although some questioned the deal value.

"Three billion will be a racy number for a business which is predominantly based in a reasonably slow-growing Hong Kong market," one person familiar with the process said.

At $3 billion, the business would be valued at about 15 times earnings and the company has recorded less than 10 percent revenue growth in the medium term, the person added.

Supermarket operators in Asia-Pacific on average trade at a 12-month price-to-earnings multiple of 18.4 times, according to Thomson Reuters data.

Li's business empire spans across ports to telecom to real estate, and his shrewd business dealings have earned him an the nickname "superman" in the local media.

His other retail operations include Watsons and electrical devices chain Fortress. Hutchison earned about 53 percent of its 2012 revenue from the retail sector.

Morgan Stanley estimates that the profit margin at Hutchison's Hong Kong retail business has stayed largely flat at 7 percent since 2007. By comparison, the margin at its mainland health and beauty unit has tripled to 18 percent from about 6 percent in 2007, the brokerage firm said.

Li has been gradually stepping up his offshore expansion, buying regulated infrastructure assets in Europe. Li's Cheung Kong Infrastructure Holdings Ltd, Hong Kong's No. 2 property developer, and its investment arms have spent $14.2 billion, including debt, buying assets globally over the past decade, according to Thomson Reuters data. ($1 = 7.7581 Hong Kong dollars) (Reporting by Denny Thomas and Saeed Azhar; Additional reporting by Donny Kwok and Stephen Aldred in HONG KONG, Jackie Range in SYDNEY, Khettiya Jittapong in BANGKOK, Ritsuko Shimizu in TOKYO; Editing by Chris Gallagher)

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