CJ Foodville Co Ltd is making only slow progress in its efforts to find a buyer for bakery chain division Tous Les Jours, with industry sources citing a valuation gap as the main obstacle to the planned transaction.

The South Korean company and deal manager Deloitte Anjin started marketing the sale a few weeks ago but have so far received a lukewarm response from investors, they said.

CJ Foodville posted revenue of 890.3 billion won ($751 million) on a consolidated basis at the end of 2019, with about 400 billion won of this amount coming from the bakery chain division, according to internal documents seen by thebell.

However, the division’s operating income has been only 20 billion won on average in recent years. Such weak profitability is largely attributable to its high cost-to-sales ratio, which is typical in the bakery sector.

After adjusting for common overhead expenses allocated to each segment, the chain’s actual operating income is further reduced to 5 billion won, which would amount to about 20 billion won of earnings before interest, tax, depreciation and amortization (EBITDA).

CJ Foodville reportedly wants about 300 billion won for the chain, based on EBITDA of 30 billion won. It is said to have added the apportionment of common overhead expenses back onto EBITDA.

But most potential buyers will likely consider an EBITDA of 20 billion won more realistic for the valuation of the unit, industry watchers said, because the post-acquisition costs will offset a reduction in overhead expenses. This means CJ Foodville could struggle to find a buyer for the unit unless it lowers its expectation.

“With its operating profit margin standing at a mere 5%, (Tous Les Jours) hardly appears attractive to private equity investors,” an analyst said. “A reduction in common overhead expenses is positive but profits are still so weak.” (Reporting by Ik-hwan Choi)