UPDATE 1-Li's Hong Kong ParknShop drops KKR and TPG from auction-sources

Wed Aug 28, 2013 1:11am EDT

* CRE emerging as frontrunner to win the auction

* Woolworths CEO cautious of overseas acquisitions

* With win, CRE may control 50 pct of HK supermarket sector

By Denny Thomas and Stephen Aldred

HONG KONG, Aug 28 (Reuters) - Private-equity bidders for Hutchison Whampoa Ltd's Hong Kong supermarket chain ParknShop were dropped from the auction amid signs strategic buyers like China Resources Enterprise (CRE) had the upper hand in a sale expected to fetch between $3-4 billion.

KKR & Co and TPG Capital Management LP were told that they were out of the running to buy ParknShop, people close to the matter told Reuters, after their offers failed to meet the company's expectations.

The exit of private equity firms leaves China's state-owned CRE, Japan's Aeon Co Ltd and Australia's Woolworths Ltd among the suitors left in the auction.

Officials at Hutchison, KKR and CRE declined to comment. TPG officials did not comment.

Some analysts say beer-to-retail conglomerate CRE, with its existing foothold in Hong Kong through its China Resources Vanguard unit and its recent joint venture with British retailer Tesco plc, is emerging as the frontrunner to win the business.

"For CRE it makes strategic sense to expand in Hong Kong, but they should be mindful of not paying too high a multiple," said Steve Chow, an analyst with Sunwah Kingsway Research.

Chow said a reasonable price-to-earnings multiple for ParknShop is in the mid-20s. CRE itself trades at a 12-month forward price-to-earnings multiple of 24.2, according to Thomson Reuters data, while Hutchison's expected price tag represents a P/E of between 15-18, a person familiar with the process previously told Reuters.

The highest private equity offer was around HK$20 billion ($2.6 billion), one of the people said.

A successful bid would have CRE controlling more than half of Hong Kong's $6.6 billion supermarket industry.

OTHER BIDDERS

On Wednesday, the CEO of Australia's largest supermarket chain, Woolworths declined to specifically comment on ParknShop, but said the company would be cautious on acquisitions.

"In fact we've said in 2011 international expansion is part of our consideration for our future growth. We never speculate on what we will be looking at. This is something we are very cautious about," CEO Grant O'Brien told reporters in a phone briefing.

Hutchison, controlled by Asia's richest man, Li Ka-shing, received at least seven offers in the first round of bidding in mid-August. Hutchison launched a strategic view of the business, though it remains unclear if it would end up selling the business or retain it..

Established in 1973, ParknShop held a 40 percent share of the Hong Kong market for supermarkets for the year to June, according to Nielsen Homescan, with Dairy Farm at 33 percent.

ParknShop generated HK$21.7 billion in revenue last year and earnings before interest, tax, depreciation and amortisation of HK$1.4 billion, another person familiar with the matter has previously told Reuters.