Wal-Mart offers $4bn for South Africa’s retailer
Wal-Mart is in
talks to buy South Africa’s Massmart, a $4 billion deal that would give
the U.S. retailer a big presence in fast-growing Africa and boost its
emerging markets strategy. The world’s largest retailer has been hit by
weakness in the United States where low-income shoppers are
particularly vulnerable to unemployment and higher gasoline prices. It
has responded by focusing on cost cuts and international growth.
Buying Massmart,
South Africa’s third-largest listed retailer by value, would give
Wal-Mart a considerable network in Africa’s biggest economy and a
foothold in 13 other countries in sub-Saharan Africa. “Massmart is a
very good fit with their business,” said Bryan Roberts, global research
director at industry research firm Planet Retail in London.
Wal-Mart has made a
non-binding proposal of 148 rand per Massmart share, valuing it at
around 30 billion rand, a premium of nearly 10 percent over Thursday’s
close of 134.75 rand. Massmart said it has granted the U.S. firm an
exclusivity period and there is no certainty of a formal offer. But
Massmart’s share price jumped 11 percent to 150 rand, above the value
of the proposed offer.
Wal-Mart’s shares
fell 0.4 percent to $53.85 and some analysts said the acquisition might
not be the best use of Wal-Mart’s cash. “Wal-Mart should be allocating
its capital first and foremost to developing U.S. urban stores and then
returning cash to shareholders,” Wall Street Strategies analyst Brian
Sozzi said in a note to clients.
Wal-Mart would
become the first major international retailer to enter South Africa,
but others could soon follow by targeting one of Massmart’s local
competitors, Roberts said. “There’s no shortage of good businesses that
could be acquisition targets — Shoprite, Woolworths and the like.”
Home to some of the
world’s fastest growing markets, Africa also boasts an emerging middle
class and roughly 1 billion consumers, making it an increasingly
attractive target for overseas investors. The deal would be Wal-Mart’s
biggest acquisition since it bought British supermarket operator Asda
in 1999.
The bid values
Massmart at 26.3 times its 12-month adjusted earnings per share,
according to Thomson Reuters data. That compares to 21.5 times for
Shoprite and 15.5 times for Woolworths. A deal is also likely to boost
South Africa’s rand which would benefit from an inflow of currency. The
rand hit a 2-1/2 year high of 6.9776 against the dollar.
Vote of Confidence
Massmart sells
general merchandise, electronics and food via a low-margin, high-volume
model. It runs nearly 290 stores and nine different retail and
wholesale chains.
It has also been
one of the most aggressive of South Africa’s retailers in expanding
into the continent. The company has 24 stores on the continent outside
of South Africa, including Nigeria, Africa’s most populous nation.
Revenue totalled 47.6 billion rand in the year to end-June, having
grown more than fourfold in 10 years. Operations outside of South
Africa now account for about 8 percent of its revenue.
