September 2, 2015 / 6:55 AM / 4 years ago

UPDATE 3-Tesco prefers MBK's $6.6 bln bid for S.Korean business - sources

* MBK bid around 7.8 trillion won - source

* Expected to be largest private equity deal in Asia

* Tesco selling assets to reduce debt, focus on UK recovery (Writes through, adds quotes, details)

By Joyce Lee and Kane Wu

SEOUL/HONG KONG, Sept 2 (Reuters) - Tesco has picked private equity firm MBK Partners as preferred bidder to buy its South Korean unit for as much as $6.6 billion, sources said, as the British supermarket retreats from overseas and focuses on revitalising its domestic business.

The sale of Homeplus, its biggest overseas unit, would be the first large divestment by Tesco boss Dave Lewis. He is seeking to cut debt and lose the firm’s “junk” credit rating status after its profits were battered by an accounting scandal and British market share losses to discounters Aldi and Lidl.

In what would be the largest-ever private equity deal in Asia, MBK bid around 7.8 trillion won ($6.61 billion), one of the sources told Reuters. Another source, while not confirming the exact amount, said MBK’s bid price had gone “higher than expected” as the bidding process continued.

Seoul-based MBK, one of the largest Asia-based private equity firms, beat bids from a consortium of buyout firms Affinity Equity Partners and KKR & Co, as well as from Carlyle Group LP, people with direct knowledge of the process said.

Its bid is backed by Singapore state investor Temasek Holdings and it is seeking funds from South Korea’s National Pension Service (NPS).

Tesco is considering taking out a 1.3 trillion won dividend from Homeplus, according to two people familiar with the matter. This was known to the bidders prior to the final submission and would be done for tax reasons, the sources said.

Homeplus and MBK declined to comment when contacted by Reuters, as did Carlyle, KKR and NPS. The sources declined to be identified as the sale process is private.

“7.8 trillion won is a very good number, that would be a positive surprise. We were expecting 7 trillion,” said Espirito Santo analyst Rickin Thakrar.

“I don’t think they’ll get out of junk status based on that (deal). I think they could probably get out of it next year, or the year after, but certainly that number would be helpful.”

Shares in Tesco, down 20 percent on a year ago, were down 0.2 percent at 185 pence at 1529 GMT on Wednesday.

CASH TO SPEND

In April Tesco posted one of the biggest losses in British corporate history, hit by a 7-billion-pound ($10.7 billion) writedown, with net debt of 8.5 billion pounds and a rising pension deficit.

The group, which has dominated the British retail landscape for decades, has paid the price for getting distracted by an expensive overseas expansion and failing to spot changing shopping habits at home, as well as the threat from discounters.

The firm has already exited Japan, the United States and, in part, China. A year ago it hired former Unilever executive Lewis to lead a turnaround at home by selling assets and cutting costs, while reducing prices and improving service to win back shoppers.

Private equity firms were attracted to its Homeplus business due to its strong cash generation and valuable property. Several buyout firms have recently raised capital to invest in Asia, but a dearth of big targets has left them with large unused funds, which also underscored their strong interest in Homeplus.

But South Korea’s hypermarket sector is saturated, with nearly one hypermarket per 100,000 people compared to the ideal ratio for the industry of one per 200,000, analysts said.

Homeplus relied on hypermarkets for more than 80 percent of its 2014 revenue of 7.05 trillion won, and has booked at least two straight years of declines in same-store sales.

Alongside Homeplus, Tesco also has its data-gathering business Dunnhumby on the block, though a source familiar with the situation said it was expected to fetch much less than early analyst expectations of 1 billion pounds or more.

Tesco has also received interest in its Thai and Malaysian businesses, though analysts expect it would only consider selling the latter of the two, which is valued at around $1.4 billion.

$1 = 1,179.3000 won; $1 = 0.6532 pounds Reporting by Joyce Lee, Kane Wu, Elzio Barreto, Neil Maidment and James Davey; Editing by Muralikumar Anantharaman and Pravin Char

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