By Dominique Vidalon
PARIS (Reuters) - Carrefour (CA.PA) is teaming up with investors to buy 127 shopping malls in which it runs stores, in a $2.8 billion deal that marks the French retailer's latest attempt to revive its struggling European hypermarkets.
The world's second-biggest retailer behind U.S. group Wal-Mart (WMT.N) has been battling for years to turn around its core hypermarket business as time-pressed customers increasingly shop locally and online, and buy non-food goods from specialists.
Chief Executive Georges Plassat has had some success with a drive to revamp stores, improve price competitiveness and cut costs. He said on Monday the rental income from the newly created property firm would help to fund further improvements.
Under the deal, Carrefour and a number of unidentified institutional investors will buy the shopping malls in France, Spain and Italy from real estate group Klepierre (LI.PA) for 2 billion euros ($2.8 billion).
Carrefour will only pay 100 million euros in cash, but will contribute 45 of its malls in France worth 700 million euros, giving it a 42 percent stake in a new company with gross annual rental income of around 180 million euros.
"It's a smart move as they get access to these shopping malls with a limited cash outlay," said Natixis analyst Jean-Baptiste Teissier.
The move reverses a deal in 2000 that saw Carrefour sell more than 150 of its shopping malls to Klepierre to cut debt and fund an expansion spree abroad.
At that time, there was a trend among store groups to shed property assets to raise money and focus on retailing. But many have since found that without owning stores, they have less freedom to make changes needed to improve performance.
"It's a bit back to the future," said Plassat, who has repeatedly said there was value to create from operating shopping malls that generate rental fees.
A source close to the matter told Reuters that a listing of the new property firm could be considered in the medium term.
At 1040 GMT (5:40 a.m. EST), Carrefour shares were up 1.4 percent at 27.55 euros, outperforming the European retail sector (.SXRP), which was up 0.9 percent. Klepierre shares were up 2.9 percent.
The new company, with over 800,000 square meters of retail space and assets of 2.7 billion euros, plans to spend 100 million euros a year over five years to upgrade the malls.
The money will help Carrefour in its drive to renovate 150 of its 220 French hypermarkets over three years as it fights to lure back lost customers.
In October Carrefour said its hypermarkets in its main French market had returned to underlying sales growth for the first time in 5-1/2 years in the third quarter.
The new property company will be financed through 1.8 billion euros in equity and 900 million in debt.
Other investors include one of Carrefour's top shareholders, U.S. private equity firm Colony Capital, as well as insurance group Predica (CAGR.PA), BNP Paribas Cardif (BNPP.PA), Pimco Asset Management, Sogecap (SOCGN.PA) and a Dutch investment fund, the source close to the matter said.
The deal, which is subject to a final agreement between the parties and regulatory approval, will have no impact on Carrefour's debt ratios, Plassat said on a conference call.
It should close in March or April 2014, he added.
The assets being purchased from Klepierre consist of small to medium-sized retail galleries, including 57 in France, 63 in Spain and 7 in Italy.
Klepierre said the deal, which accelerates the reshaping of its portfolio toward large shopping malls, would result in net cash proceeds of 1.54 billion euros, which it will use to repay 1.3 billion in credit facilities and for selective acquisitions.
($1 = 0.7283 euros)
(Additional reporting by Pacale Denis; Editing by Astrid Wendlandt and Mark Potter)