British grocer Tesco Plc is among bidders expected to express interest in buying a controlling stake in South Korean electronics retailer Hi-Mart Co Ltd <071840.KS>, two sources familiar with the matter told Reuters.

The top three shareholders of Hi-Mart, including Eugene Corp <023410.KQ>, have appointed Citigroup Inc to advise on the sale. The 57.6 percent combined stake up for grabs is worth about $900 million (574 million pound) based on Hi-Mart's latest share price.

The auction is attracting interest from South Korean domestic retailers and several private equity firms as they eye robust retail sales is Asia's fourth-biggest economy. Although South Korea's economy is running out of steam as a result of the euro zone debt crisis, retail sales rebounded in December.

First 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 to the media.

The sources said it was unclear whether Tesco would submit a formal bid.

Tesco, the world's third-biggest retailer, declined comment.

Tesco has a fully-owned retail business in South Korea, named Homeplus, operating 125 large retail stores and 267 supermarkets. 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.

South Korean retailers Shinsegae Co Ltd <004170.KS> and Lotte Group are considering bidding for the stake. However, GS Retail <007070.KS> said on February 2 that it had decided not to pursue the deal after initially showing interesting 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. The planned sale of controlling stake comes less than a year after the company was floated on South Korean stock exchange.

Hi-Mart shares rose 1.3 percent after the Reuters report, compared with a 1.11 percent fall in the benchmark KOSPI index <.KS11>.


Hi-Mart was previously owned by Pan Asia buyout fund Affinity Equity Partners, which sold its investment in 2008 in one of the most highly profitable exits in Asia.

Several 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 typically 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.

Hi-Mart's earnings before interest, tax, deprecation and amortisation 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.

Tesco has been battling a challenging environment and issued its first profit warning in living memory last month.

Disposable incomes across much of Europe 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. Retailers such as Tesco are looking to diversify revenue streams into Asia, where retail spending is considerably higher due to stronger economic growth. Tesco operates more than 5,300 stores in 14 countries.

(Reporting by Denny Thomas and Prakash Chakravarti in HONG KONG; Additional reporting by Ju-min Park in SEOUL; and James Davey in LONDON; Editing by Chris Lewis)