Failed Japanese supermarket Mycal has shortened its list of candidates to help rebuild the business.  The number of firms under consideration is now down to five. However, it isn’t clear that it would suit any of the likely buyers to keep to Mycal’s aim of keeping the chain together. The majority of potential sponsors would be better off taking just some of its 140 stores.

Since the start of this month, failed Japanese supermarket Mycal has been holding discussions with candidates to help it rebuild the business. It has now narrowed its list to about five, with the final decision expected by the middle of next month. A successful sponsor would take over Mycal’s operations in exchange for guaranteeing the supermarket’s obligations to suppliers.

Who will be the chosen one? Investment funds, including GE Capital and Ripplewood Holdings, are expected to have made bids, but seem unlikely to have made it to the shortlist. Some smaller Japanese supermarkets may also be interested, including Izumiya, Izumi, Heiwado and Fuji. However, Mycal would prefer to remain a single entity, or at least keep a large hunk of the business together. The smaller companies are unlikely to have the resources, or the inclination, to do this. Izumiya, for example, is interested in just 20 stores around Osaka.

Wal-Mart is considered a leading runner. It’s big, it’s powerful, and a takeover on this scale is within its capabilities and typical strategic boundaries. Especially since Japanese local authorities are reluctant to issue permits for new, large retail outlets for fear of hurting smaller businesses, taking over Mycal’s network could represent Wal-Mart’s best chance of breaking into Japan. However, the high cost base of many stores, combined with the difference between Mycal and Wal-Mart’s formats, could create problems.

AEON is another favorite. It’s an anomaly in the Japanese retail industry, bucking the downward trend to report a 26% increase in H1 profits last week. However, it was still in the red after including the cost of fixing pension fund shortfalls. Even ignoring Mycal’s similar pension problems, now may be a bad time for Aeon to take on the whole Mycal empire – just acquiring a few choice stores would be better.

Indeed, for the majority of applicants, taking on a few of the stores would be much more suitable than tackling the entire chain. Mycal may have to accept a break-up.

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