* Wesfarmers hoped to raise up to A$1.5 bln from Officeworks IPO
* Says dropping IPO plans "in light of current equity market"
* Move highlights challenges in Australia's retail sector (Recasts, adds fund manager comment, IPO data)
By Byron Kaye and Tom Westbrook
SYDNEY, May 17 (Reuters) - Australia's Wesfarmers Ltd cancelled a potential $1.1 billion IPO of its office supplies unit, underscoring uncertainty in a retail sector hit by weak spending and the slated arrival of online shopping giant Amazon.com Inc.
The scrapping of Officeworks' listing disrupts a plan by Wesfarmers, Australia's biggest company by sales, to carve off non-core assets and focus on its biggest revenue spinner, supermarket chain Coles, itself facing fresh competition from cut-price entrants like ALDI Inc.
"As a shareholder, I would have preferred them to sell it," said Danial Moradi, equity strategist at Lonsec Stockbroking, which owns Wesfarmers shares, referring to Officeworks.
"It's definitely a concern for a potential buyer of that business, the competitive threat. You probably wouldn't value it at premium multiples, not with this big threat hanging around the corner," Moradi said, referring to Amazon.
Seattle-based Amazon said last month it would open its online shopfront service at an unspecified time in Australia, in a move set to increase pressure on the domestic retail sector to catch up with the digital economy.
Wesfarmers said in a statement on Wednesday that it pulled the listing because "current equity market conditions" would mean the sale "would not realise appropriate value" for the asset. A spokeswoman declined to comment on the impact of Amazon's announcement.
Bankers were distributing marketing materials for what was to be the country's IPO of the year as recently as this month, according to brokers who saw the material.
Share price pressure has, however, been building for months on retailers as fund managers short-sell stocks they see as vulnerable to online competition, higher overheads due to a softening Australian dollar, and soft discretionary spending caused by high housing prices.
Among Officeworks' peers, shares of electronics retailer JB Hifi are down 15 percent in the past three months, while Harvey Norman has lost 24 percent. Wesfarmers shares are up 0.7 percent over the same period while the benchmark S&P/ASX 200 index is flat.
Wesfarmers shares were down 1.2 percent on Wednesday, compared to the broader market's 0.9 percent fall.
Graeme Burke, a principal at WaveStone Capital, which owns Wesfarmers shares, said Amazon's imminent entry could be a double whammy for retailers. "You've seen multiples contract because of that expected increase in competition (but) what does it actually do to underlying earnings?".
Last week, department store Myer Holdings Ltd said third-quarter sales were down 3.3 percent, while luxury handbags maker Oroton on Tuesday downgraded earnings guidance citing "soft trading conditions".
The cancellation lays the groundwork for a lacklustre year of IPO activity in Australia, which is already down 39 percent compared to the same time a year earlier, by the amount of money raised, according to Thomson Reuters data.
Wesfarmers bought the then-struggling office supplies unit as part of its A$19.3 billion takeover of supermarket chain Coles in 2007. Officeworks' earnings have nearly doubled since then. ($1 = 1.3463 Australian dollars) (Additional reporting by Swati Pandey; Editing by Jonathan Barrett and; Muralikumar Anantharaman)