March 7, 2018 / 6:33 PM / 4 months ago

Exclusive: Walmart Brazil ops bidders peg unit's back taxes at up to $3 billion - sources

SAO PAULO (Reuters) - Potential acquirers of Walmart Inc (WMT.N) operations in Brazil have estimated the unit owes up to $3 billion in back taxes to state governments, according to three people with knowledge of the matter, which could add to pressure for a discount sale.

FILE PHOTO: The main entrance to a Walmart store is pictured in Sao Paulo, Brazil February 14, 2018. REUTERS/Paulo Whitaker

Buyout firms Advent International Corp, GP Investments Ltd GPIV11.LU and Acon Investments delivered non-binding offers for a majority stake in Walmart’s Brazil unit in late January and became aware of the unpaid tax bill while digging into the company’s books, the people said.

The three investment firms, Walmart and its financial adviser Goldman Sachs & Co (GS.N) are discussing a way for the U.S. retailer to assume the largest part of the tax liabilities in Brazil while handing over control of its assets there, according to the sources.

Walmart representatives in Brazil said the company “does not comment on market speculation.” Advent declined to comment. Acon and GP Investments did not immediately respond to requests for comment.

The hefty back taxes, which Walmart is fighting in court, are just one consequence of years of costly mistakes in Brazil for the world’s biggest retailer, resulting in a sprawling and unprofitable operation that sources have said drew little buying interest from rivals. [nL2N1PI023]

The biggest tax liabilities stem from local retail tariffs in different states, with the highest numbers in the states of Santa Catarina and Pernambuco, where Walmart acquired regional supermarket chains during an ill-fated expansion more than a decade ago, the sources said.

Both states are suing Walmart and at least two former chief executives in the country over the tax bills, according to regional court documents seen by Reuters.

The U.S. retailer is paying lawyers to defend its former executives, one person with knowledge of the matter said.

State treasury officials declined to comment on the tax liabilities, citing tax secrecy laws.

FILE PHOTO: The logo of Walmart is seen on shopping trolleys at their store in Sao Paulo, Brazil February 14, 2018. REUTERS/Paulo Whitaker/File photo

The state taxes ultimately paid could be less than the bidders’ estimates, and other potential buyers may value the liability differently.

Walmart has had operational problems handling its taxes for years in Brazil as it tried to adapt its proprietary management software to deal with the complex calculations of Brazilian retail taxes, according to one of the sources.

The huge tax liability will make it even harder for Walmart to profit on the sale of about 540 stores in Brazil, which generate almost 30 billion reais ($9.4 billion) of revenue in 2016 but have struggled to turn a net profit. (reut.rs/2DWNOtp)

Given the lack of profitability, at least one of the buyout firms intends to break up Brazil’s Walmart operations after acquiring control, the sources added.

Cash-and-carry division Maxxi and regional supermarket Bompreço, with nearly 60 stores in the northeast Brazil, could be sold to local rivals. Operations in the south, where Walmart has around 130 stores operating under four brands, could also be sold as an independent unit, according to sources.

Membership-only retail chain Sam’s Club, one of the few profitable unit in Brazil, could be prepared for an initial public offering, said a source close to one of the bidders.

The other buyout firms may attempt a more traditional turnaround, improving profitability without breaking up current Walmart operations, sources said.

Reporting by Tatiana Bautzer and Carolina Mandl; Editing by Brad Haynes and Meredith Mazzilli

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