* Tesco (LSE: TSCO.L - news) 's S.Korea unit Homeplus had $4.62 bln sales in Q3-filing
* Hi-Mart 2012 EBITDA forecast at $343 mln-Thomson Reuters (Toronto: TRI.TO - news) data
* Private equity firms interested, but financing hard - sources
* Hi-Mart shares hit session high, buck weakness in broader mkt (Adds quotes from source and analyst; updates share price)
HONG KONG, Feb 23 (Reuters) - Tesco Plc, the world's third-biggest retailer, may bid for a controlling stake valued at about $900 million in South Korean electronics retailer Hi-Mart Co Ltd, two sources with knowledge of the matter said, as the British grocer eyes growth markets to offset challenging times at home.
Disposable incomes across much of Europe (Chicago Options: ^REURUSD - news) are being squeezed by rising prices, muted wage growth and government austerity measures, with consumers also worried about the fallout from the euro zone sovereign debt crisis. Those challenges led to Tesco issuing its first profit warning in living memory last month.
Retailers such as Tesco are thus looking to diversify revenue streams into Asia, where retail spending is considerably higher due to stronger economic growth.
The news of Tesco's likely interest in the auction boosted Hi-Mart shares as much as 2.4 percent, bucking a 1 percent fall in South Korea's benchmark share index. The stock ended up 1.7 percent.
Tesco shares were up 0.7 percent in morning trade in London.
"It's a good cash generating business to attract Tesco. But how serious Tesco is remains to be seen," one of the sources said.
The top three shareholders of Hi-Mart, including Eugene Corp , have appointed Citigroup Inc (NYSE: C - news) to advise on the sale. The 57.6 percent combined stake up for grabs is worth about $900 million based on Hi-Mart's latest share price.
The auction is largely attracting interest from South Korean domestic retailers, though some private equity firms are exploring options. Sources say private equity may find it hard to finance the deal.
The eventual winner is looking to benefit from robust retail sales is Asia's fourth-biggest economy. Although South Korea's economy is running out of steam due to the euro zone debt crisis, retail sales rebounded in December.
First (OTC BB: FSTC.OB - news) -round bids for Hi-Mart's stake are due before the end of this month, said the sources, who declined to be identified as they were not authorised to speak publicly about the matter.
Tesco declined to comment.
"Hi-mart is the leader in electronics retail business, so it has some competitive edge and specific channels which potential buyers don't have," said Hong Sung-soo, an analyst at NH Investment & Securities.
WILL PRIVATE EQUITY BID?
Tesco already has exposure to the South Korean market through its fully-owned subsidiary Homeplus, which operates 125 large retail stores and 267 supermarkets. Tesco operates more than 5,300 stores in 14 countries.
Unlisted Homeplus recorded 5.2 trillion won ($4.62 billion) in sales for the third quarter of 2011 and 301.5 billion won in operating profit for the same period, according to a recent regulatory filing.
A $900 million investment for Tesco is insignificant relative to its overall size, given Tesco generates about $1.85 billion in weekly revenues. But the decision on whether to bid or not will hinge on how competitive the auction gets.
South Korean retailers Shinsegae Co Ltd and Lotte Group are considering bidding for the stake. However, GS Retail said on Feb. 2 that it had decided not to pursue the deal after initially showing interest in the process.
Hi-Mart, which has 301 branches nationwide, recorded an operating profit of 257.4 billion won ($228.6 million) for 2011, according to a recent regulatory filing.
Its (Euronext: ALITS.NX - news) earnings before interest, tax, deprecation and amortisation (EBITDA) is forecast to be $343 million for the year to December 2012, according to Thomson Reuters estimates. Usually, retail businesses are sold at about 8-9 times EBITDA multiple, which translates to an enterprise value of $3.1 billion.
The planned sale of the controlling stake comes less than a year after Hi-Mart was floated on the South Korean stock exchange.
Hi-Mart was previously owned by Pan Asia (Xetra: A0YFTQ - news) buyout fund Affinity Equity Partners, which sold its investment in 2008 in one of the most highly profitable exits in Asia.
Some private equity firms are also interested in buying the stake, sources said, although financing is seen as a challenge as it does not involve a complete buyout of Hi-Mart.
Banks usually prefer to lend to private equity firms that are involved in total buyout situations. For instance, in April 2005 Affinity raised 412 billion won through a leveraged buyout financing to fund its 100 percent buyout of Hi-Mart. Affinity's initial investment of $200 million in Hi-Mart returned around $2.1 billion when it exited in 2008. ($1 = 1125.9750 Korean won) (Additional reporting by Ju-min Park in SEOUL, James Davey in LONDON and Stephen Aldred in HONG KONG; Editing by Chris Lewis and Muralikumar Anantharaman)
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