Aeon Shares Climb On Talbots Stake Sale, But Bumpy Road Ahead

Investors snapped up shares in Aeon Co. (8267.TO) Wednesday on news that the Japanese retail giant will unload its stake in U.S.-based women's apparel retailer Talbots Inc. (TLB).

The stake sale comes as Aeon shifts its focus away from the U.S. and Japanese markets, seeking instead to capitalize on growth in emerging Asian countries such as China.

At midday on the Tokyo Stock Exchange, Aeon shares were 3.4% higher at Y753 on heavy trading volume, after soaring 7.4% to Y782 earlier in the day.

"This is a positive for Aeon's overseas strategy...it makes more sense to seek expansion in China and the rest of Asia, rather than North America," said SMBC Friend Research Center analyst Shun Tanaka.

The company announced earlier Wednesday that it has decided to sell its entire 54% stake in Talbots to a special purpose acquisition company, BPW Acquisition Corp. (BPW), with which Talbots will merge.

Aeon said the sale won't have impact on its earnings for the current business year, partly because it has already booked valuation losses from the Talbots stake. An Aeon spokesman said that although almost no cash is expected from the deal, the company will receive roughly Y25 billion in repaid loans.

In its mid-term business plan released last year, Aeon set out its strategy for a rapidly changing business environment, calling for a slower pace of domestic store openings and faster expansion in Asian countries such as China.

Aeon faces fierce competition in its home market from rivals such as Seven & I Holdings Co. (3382.TO) and Wal-Mart Stores Inc.'s Japanese unit Seiyu Ltd., as well as continued deflationary pressures.

Japan's supermarket sales have fallen steadily since their peak in 1997, amid an aging population and a slumping economy. Nationwide sales fell to Y13 trillion in 2008, about 21% lower than in 1997. That comes as nationwide supermarket floor space more than doubled in 20 years by 2008.

Aeon acquired the Talbots stake in 1988 for Y41 billion, but losses at the U.S. firm have squeezed the Japanese company's profitability in recent years. In October, Aeon reported a net loss of Y14.68 billion for the first half ended Aug. 31. The company's retail business segment saw a 93% tumble in operating profit to Y1.23 billion for the same period.

SMBC Friend Research Center's Tanaka said that further gains in Aeon's shares are unlikely, as although the issue's valuation remains cheap, "the domestic business environment remains tough due to deflation and weak consumption."

-By Hiroyuki Kachi, Dow Jones Newswires; 813-6895-7562; [e-mail]

(Juro Osawa contributed to this article.)