By Denny Thomas and Donny Kwok
HONG KONG (Reuters) - Singapore state investor Temasek Holdings (TEM.UL) has agreed to buy almost a quarter of health and beauty retailer A.S. Watson for about $5.7 billion in what would be its single biggest investment and one that would boost its exposure to Asia's fast growing consumer sector.
The purchase of 24.9 percent of A.S. Watson, owned by Asia's richest man Li Ka-shing, is part of Temasek's aggressive reshaping of its $170 billion portfolio to ensure higher returns. The state investor's returns have often lagged its own internal metric in recent years as it focused on blue chip stocks.
Retail sector investments are seen as a way to profit from rising consumer spending in emerging Asian markets such as China and Indonesia. A.S. Watson's business includes personal care stores which dominate the beauty and health market in China, a sector forecast to grow by around 40 percent to $186 billion by 2015.
"The consumer retail sector is a good proxy to growing middle income populations and transforming economies," Chia Song Hwee, head of the Temasek's investment group, said in a statement.
"This is very much part of our investment themes as we shape Temasek's portfolio for the long term."
Temasek has 24 consumer-related direct investments, according to Standard & Poor's CapitalIQ database. They include China online education services company TutorGroup, global sourcing firm Li & Fung Ltd <0494.HK> and Indonesia retail giant PT Matahari Putra Prima TBK (LPPF.JK).
Last week, a Temasek-led shareholder group offered $2.1 billion in cash for the shares in commodities trader Olam International Ltd (O32.SI) they don't already own. Reuters previously reported the state investor was seeking to sell a stake in Thai telecoms operator Shin Corp (INTUCH.BK).
Li's Hutchison Whampoa <0013.HK>, which owns A.S. Watson, said in a statement on Friday that it would use part of the proceeds from the stake sale to pay a special dividend of HK$7.00 per share to its shareholders.
Hutchison launched a strategic review of its retail operations in October, aiming to float part of A.S. Watson in Hong Kong, among other financial centers, in what would have been the world's biggest retail sector initial public offering.
Li told reporters he was still considering an IPO in A.S. Watson in Hong Kong and Singapore, but that any such offering was likely to happen in two to three years.
Li had previously said the IPO, aimed at raising money to expand the health and beauty business in China, was likely to take place this year.
"We have a very good relationship with Temasek," Li said. "Sometimes we are not only looking at the pricing. If the partners like it very much and consider we are doing the right thing, we are happy."
Temasek's investment in A.S Watson values the company at HK$177 billion ($22.8 billion). A.S. Watson's business includes supermarket chain ParknShop and the Watsons and Superdrug and Kruidvat personal care stores.
Last year, Hutchison Whampoa scrapped the sale of ParknShop after bids for the company came in below expectations.
A.S. Watson last year generated $19.2 billion in revenue last year from some 11,000 outlets worldwide.
Its net profit rose by 13 percent in financial year ending Dec 29, 2013 to HK$7.8 billion, Hutchison said in the statement.
(Additional reporting by Stephen Aldred and Donny Kwok; Editing by Ryan Woo and Miral Fahmy)