By Guillermo Parra-Bernal and Marcela Ayres
SAO PAULO (Reuters) - France's Carrefour SA
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 requested anonymity 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 archrival GPA SA
Another potential bidder is a sovereign wealth fund that the source would not name. While the structure of the deal is still under discussion, it could include the sale of a stake in Atacadão, Carrefour's cash-and-carry wholesale unit, a second source said.
Carrefour and a spokeswoman for São Paulo-based Tarpon declined to comment. A spokeswoman for Diniz, a 77-year-old billionaire who is a mainstay in the Brazilian society pages, denied that a deal with Carrefour was in the works.
Last week, Carrefour Chief Executive Officer 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 said, however, that a private placement, through which a company sells a stake without carrying out a public offering, was under consideration.
Proceeds from the deal would help Carrefour take on GPA in Brazil's competitive retail market, where demand remains robust because of years of steady household income gains and job creation.
Both sources said Carrefour hired Credit Suisse Group AG
Shares of Carrefour erased their declines following the news of the possible deal but retreated later in the session to close 1.6 percent lower at 27.140 euros. Shares of GPA were up 0.8 percent in São Paulo.
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 probably seek a greater discount because of fears that the tax crackdown could end up reducing Atacadão's client base, the first source said.
RETURN TO RETAIL
A deal with Carrefour would mark Diniz's return to retailing. The eldest son of GPA's founder, he left the company in September to turn around BRF SA
Diniz fell out with France's Casino Guichard Perrachon & Cie
Casino did not insist on a non-compete clause with Diniz, who never hid his intention to return to the retail industry.
Both Casino and Carrefour are looking to emerging markets to offset sluggish growth at home.
Cash-and-carry stores like Atacadão allow grocery store owners and other consumers to buy goods in bulk 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 in the last decade.
Other cash-and-carry chains in Brazil include GPA's Assai and Wal-Mart Stores Inc's
Operational profit margins at Atacadão are estimated at 6.5 percent of revenue, compared with 3.1 percent at Assai, the analysts said. They said Atacadão benefited from its larger scale and almost 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, Stephen Powell and Lisa Von Ahn)