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* Hutchison to use proceeds to pay special dividend
* A.S. Watson IPO expected in next two to three years
* Deal values A.S.Watson at $22.8 billion (Adds context on IPOs, details on previous offerings by LiKa-shing companies)
By Denny Thomas and Donny Kwok
HONG KONG, March 21 (Reuters) - Singapore state investorTemasek Holdings has agreed to buy just under a quarterof health and beauty retailer A.S. Watson for about $5.7 billionin what would be its single biggest investment and one thatwould boost its exposure to Asia's fast growing consumer sector.
The purchase of the 24.9 percent in A.S. Watson, owned byAsia's richest man Li Ka-shing, is part of Temasek's aggressivereshaping of its $170 billion portfolio to ensure higher returnsby increasing its exposure to unlisted companies. The stateinvestor's returns have often lagged its own internal metric inrecent years as it focused on blue chip stocks.
Retail sector investments are seen as a way to profit fromrising consumer spending in emerging Asian markets such as Chinaand Indonesia. A.S. Watson's business includes personal carestores which dominate the beauty and health market in China, asector forecast to grow by around 40 percent to $186 billion by2015.
"The consumer retail sector is a good proxy to growingmiddle income populations and transforming economies," Chia SongHwee, head of the Temasek's investment group, said in astatement. "This is very much part of our investment themes aswe shape Temasek's portfolio for the long term."
Billionaire Li's Hutchison Whampoa, which ownsA.S. Watson, had planned to float part of the retailer in aninitial public offering slated for this year and which wouldhave been the world's biggest retail sector IPO.
Recent stock offerings, however, have been hit by investorworries about China's economic slowdown, a factor that haspartly pushed the benchmark Hang Seng index down 9.1percent so far this year and led to two Hong Kong IPOs beingpulled this month.
Three of Li's businesses have also underperformed thebroader market since their IPOs. Hutchison Port Holdings Trust has tumbled 37 percent since its Singapore IPO inMarch 2011. Hui Xian Real Estate Investment Trust (REIT) has dropped 34.5 percent since its Hong Kong listingin April 2011 and HK Electric Investments is down 10.1percent since its January listing.
"We have a very good relationship with Temasek," Li toldreporters after the A.S. Watson deal was announced. "Sometimeswe are not only looking at the pricing. If the partners like itvery much and consider we are doing the right thing, we arehappy."
Hutchison was far advanced with its plans for an A.S. WatsonIPO when Temasek expressed interest in buying a bigger stake inthe company and a deal was struck within two weeks, a personfamiliar with the matter said.
EYEING CHINA CONSUMERS
A.S. Watson would join Temasek's portfolio of 24consumer-related direct investments, according to Standard &Poor's CapitalIQ database. These include China online educationservices company TutorGroup, global sourcing firm Li & Fung Ltd and Indonesia retail giant PT Matahari Putra Prima TBK.
Last week, a Temasek-led shareholder group offered $2.1billion in cash for the shares in commodities trader OlamInternational Ltd they don't already own. Reuterspreviously reported the state investor was seeking to sell astake in Thai telecoms operator Shin Corp.
Hutchison Whampoa said in a statement on Friday that itwould use part of the proceeds from the stake sale to pay aspecial dividend of HK$7.00 per share to its shareholders.
Li said he was still considering an IPO in A.S. Watson inHong Kong and Singapore, but that any such offering was likelyto happen in two to three years. The offering was aimed atraising money to expand the health and beauty business in China.
Temasek's investment in A.S. Watson values the company atHK$177 billion ($22.8 billion). A.S. Watson's business includessupermarket chain ParknShop and the Watsons and Superdrug andKruidvat personal care stores.
Last year, Hutchison Whampoa scrapped the sale of ParknShopafter bids for the company came in below expectations.
A.S. Watson last year generated $19.2 billion in revenuefrom some 11,000 outlets worldwide. Its net profit rose by 13percent in same year to HK$7.8 billion, Hutchison said in thestatement.
Bank of America Corp, DBS Holdings,Goldman Sachs Group and HSBC acted as advisorsfor Hutchison Whampoa, the statement added. ($1 = 7.7645 Hong Kong Dollars) (Additional reporting by Stephen Aldred, Donny Kwok and YimouLee in HONG KONG and Saeed Azhar in SINGAPORE; Editing by RyanWoo and Miral Fahmy)
