UPDATE 1-Wal-Mart in talks on partnership with Indonesia's Matahari - Reuters

* Partnership could involve taking stake - sources
* Partner may face tight retail margins - analyst

Wal-Mart Stores Inc (WMT.N) is in talks to become a partner of Indonesian retailer PT Matahari Putra Prima (MPPA.JK) to develop its hypermarts, though South Korea's Lotte Shopping Co Ltd (023530.KS) has pulled out, sources said on Tuesday.

International retailers are jockeying for position in emerging markets as they look for sources of growth outside maturing U.S. and European markets, although the cost of competing is often too much to justify widespread expansion.

Lippo Group, an Indonesian conglomerate which controls Matahari via PT Multipolar (MLPL.JK), last month scrapped plans to sell its Hypermart chain because of low offers and instead opted to seek a global partner to expand.

"Lotte is out due to disagreement over pricing and branding," said one of the four sources with direct knowledge of the deal, who declined to be identified because the details were not public.

"However, Wal-Mart is still in talks with the group on the possible partner deal."

Wal-Mart and Lotte had both been interested in buying the Hypermarket assets, along with French retailer Casino Guichard Perrachon SA (CASP.PA) and private equity group Carlyle Group CYL.UL, in a sale that Lippo had hoped would raise over $1 billion.

The partnership could still involve taking a significant stake in Matahari to gain control over the hypermarket assets, the sources said.

Wal-Mart, the world's biggest retailer, has a significant investment in China including 104 hypermarkts, and in India it has a joint venture with Bharti Enterprises, while Casino just bought Carrefour's (CARR.PA) Thai assets for $1.2 billion.

Lotte already has a significant presence in Indonesia with its Lottemart chain and is currently the fourth biggest hypermart player in Southeast Asia's biggest economy.
Indonesia has been an hot investment destination in the past two years, with its stock market surging 46 percent last year. Growing domestic consumption, together with public spending and investment, led fourth quarter 2010 GDP to rise 6.9 percent.

However, Ari Pitoyo, senior retail analyst at PT Mandiri Sekuritas in Jakarta, warned that firms looking for a slice of Indonesia's consumer sector could face tight profit margins.
"Indonesia's retail business is very tight in margins because it doesn't have bargaining power with food producers like Indofood and Unilever," Pitoyo said.

"Whoever comes in as a Matahari partner has to be very efficient, including in logistics, to reap the benefit, or will have to face some losses."

Multipolar, which owns a 48 percent stake in Matahari, appointed Bank Of America Merrill Lynch (BAC.N) to become its strategic advisor to seek a global partner for Matahari. Hypermart is Indonesia's second-biggest hypermarket chain after PT Carrefour Indonesia, with 52 outlets in the world's fourth most populous nation, generating annual revenue of $1 billion. It told Reuters last month it is eyeing the top spot and aims to expand aggressively across the archipelago.