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EXCLUSIVE-Carrefour seeks Brazil private stake sale, Diniz eyes deal

SAO PAULO, March 13 (Reuters) - France's Carrefour SA could raise as much as 5 billion reais ($2.1 billion) from the sale of a stake in its Brazilian unit, one source with direct knowledge of the situation said, with potential bidders including Brazilian tycoon Abilio Diniz and a sovereign wealth fund.

Carrefour, the No. 2 retail chain in Brazil, sees a private placement as a more feasible alternative than an initial public offering, said the source, who declined to be identified because the talks remain private. Capital markets activity in Brazil, including IPOs and share offerings, is off to its worst annual start since at least 2004.

Diniz, who stepped down last year as chairman of Carrefour's arch rival GPA SA after significantly reducing his stake in the company, has teamed up with buyout firm Tarpon Investimentos SA and another investor for the deal, the source said. Talks between Carrefour and the group led by Diniz and Tarpon are "at a very advanced stage", the source added.

Another potential bidder is a sovereign wealth fund, which the source declined to name. A second source said Carrefour could raise at least 4 billion reais in the transaction, depending on the structure of the deal, which could include the sale of a stake in Atacadão, its cash-and-carry wholesale unit.

Carrefour declined to comment. A spokeswoman for Diniz, a 77-year-old billionaire who is a mainstay in the Brazilian society pages, denied a deal with Carrefour was in the works. A spokeswoman for São Paulo-based Tarpon also declined to comment.

Last week, Carrefour Chief Executive Georges Plassat said a listing in Brazil could take place in 2015 and that local investors would help the French retailer expand in Latin America's largest market. Plassat also acknowledged, however, that a private placement, through which a company sells a stake without carrying out a public offering, was under consideration.

Proceeds from a deal would help Carrefour take on GPA in Brazil's fiercely competitive retail market, where demand remains robust thanks to years of steady household income gains and job creation.

The first source said Carrefour began to consider alternatives other than an IPO for Atacadão following a crackdown by state tax authorities, who are trying to identify customers to see if they are evading retail taxes.

Small grocery retailers are the main clients at Atacadão and other cash-and-carry stores in Brazil.

In an IPO, investors would likely seek a greater discount because of fears the tax crackdown could end up reducing Atacadão's client base, the first source said. The sources said Carrefour hired Credit Suisse Group AG to manage the transaction. Credit Suisse did not have an immediate comment.

RETURN TO RETAIL

A deal between Carrefour and Diniz would mark the tycoon's return to retailing after his abrupt departure last year from GPA, which was then called Grupo Pão de Açúcar.

Diniz fell out with Casino Guichard Perrachon & Cie , his partner at GPA, after he initiated merger talks with Carrefour without Casino's blessing in 2011. The deal would have given Carrefour a stake in GPA, just as Casino was preparing to take control of the Brazilian retailer under a previous shareholder agreement with Diniz.

Casino and Carrefour are arch rivals in France, where they are based. Both are aggressively looking to emerging markets to offset sluggish growth in their home market.

Last September, Casino and Diniz parted ways following years of bitter boardroom battles and lawsuits. Diniz, the eldest son of GPA's founder, exited the company to turn around BRF SA , a Brazilian processed foods company that is the world's No. 1 poultry producer.

Casino did not insist on a non-compete clause with Diniz, who never hid his intention to return to the retail industry.

CASH-AND-CARRY

Cash-and-carry wholesale stores, like Atacadão, allow customers to buy goods in bulk from the shelves and settle the purchase on the spot, removing the costs of delivery and customer credit associated with other kinds of wholesale.

The format became popular in Brazil in recent years and has attracted the attention of investors because of its low distribution cost ratios and higher returns on invested capital.

Carrefour bought its Atacadão wholesale unit in 2007 for $1.1 billion, a deal that many analysts say was its most significant acquisition globally in the last decade.

Other cash-and-carry chains in Brazil include GPA's Assai brand, Wal-Mart Stores Inc's Maxxi Atacado. According to estimates by analysts at Espírito Santo Investment Bank, Atacadão accounts for 75 percent of Carrefour's profits in Brazil.

Operational profit margins at Atacadão are estimated at 6.5 percent of revenue, compared with 3.1 percent at Assai, the analysts said, noting that the former benefits from larger scale and the fact that it has no rental costs because it owns the real estate where most of its 100 stores are located.

($1 = 2.35 Brazilian reais)

(Editing by Todd Benson and Stephen Powell)