Wal-Mart’s proposed offer of 148 rand ($21.10) a share would value South Africa’s second-largest listed retailer at about 32 billion rand including share options, Massmart Chief Executive Officer Grant Pattison said today. The offer price is 9.8 percent higher than Massmart’s last closing price and 66 percent above the share price at the end of last year.
Wal-Mart is ramping up international expansion as it attempts to make up for slowing growth in the U.S., where same- store sales have fallen for five consecutive quarters. South Africa, the biggest economy on the continent, represents a platform for expansion into southern Africa, according to Andy Bond, Wal-Mart’s executive vice president overseeing the Bentonville, Arkansas-based company’s operations in the region.
“It’s a vote of confidence in the country and in the retail sector,” said Syd Vianello, a retail analyst at Nedcor Securities in Johannesburg with a “hold” rating on Massmart. “It’s a rich price they’re paying. Wal-Mart obviously believes they can do a hell of a lot more with Massmart.”
The deal would be a 15.3 percent premium over Massmart’s average close in the 20 days prior to the announcement, according to data compiled by Bloomberg. That compares with 14 percent for other retail industry deals over the past five years. In the 12 acquisitions Wal-Mart has made over that period, it paid an average premium of 23 percent.
Massmart surged 11 percent to 149 rand in Johannesburg, giving the company a market value of 30 billion rand, after earlier climbing as much as 14 percent. Wal-Mart dropped 60 cents to $53.48 at 4:15 p.m. in New York Stock Exchange composite trading.
Massmart’s stock trades at a multiple of 26.3 times earnings, the highest of all listed South African retailers. Shoprite, the country’s biggest listed retailer, has a ratio of 21.1. Massmart operates 290 stores, mostly in South Africa. The retailer has 24 stores in 12 other African countries including Botswana, Zimbabwe, Tanzania, Nigeria and Ghana.
The purchase would be Wal-Mart’s largest since it bought U.K. supermarket chain Asda for about $11 billion in 1999. Wal- Mart said in August that cash flow was about $4.5 billion, compared with $4.2 billion in the prior year.
“By Wal-Mart standards, this is a pretty chunky deal and shows our commitment to the market,” Wal-Mart’s Bond said in an interview today. Massmart is “a strong food provider through the wholesale channel, but also an emerging, food retail business and finally a good platform.”
Wal-Mart operated more than 4,000 stores in 14 foreign countries through April, with sales outside the U.S. topping more than $100 billion in the most recent fiscal year.
“Investors may have reservations about the company’s decision to pursue acquisitions in a new part of the world, particularly at such high multiples,” analyst Colin McGranahan of Sanford C. Bernstein said in a note to clients. The acquisition “may disappoint people hoping that the company would begin to return more capital to shareholders.” The New York-based analyst rates the shares “market perform.”
In May, the Asda unit agreed to buy the Netto’s discount- supermarket chain for about $1.2 billion. International chief Doug McMillon said in June that the company has pursued several acquisitions in Russia, where it doesn’t have any stores.
Wal-Mart also may be interested in acquisitions in countries such as Turkey, Colombia, Peru, and Japan to expand internationally, according to Bryan Roberts, global research director at consultancy Planet Retail in London. McMillon said in June that the Americas are Wal-Mart’s “first priority” when it comes to expansion, followed by Asia and then Europe.
Bond wouldn’t comment on whether Wal-Mart would seek further deals in Africa or add to Massmart’s smaller food retail business. Massmart’s operations are mostly wholesale.
“It’s the right market and the right entry vehicle for us and they themselves have aggressive plans for growth that we hope to support,” Bond said.
The South African company last month reported a 7 percent decline in profit in the year through June 27 as job losses from the 2009 recession curbed consumer spending.
South Africa’s economy is expected to expand 3.2 percent this year, compared with a contraction of 1.8 percent in 2009, the International Monetary Fund said on Sept. 21. Growth will probably reach 3.6 percent in 2011 and 3.9 percent in 2012.
Growth in Sub-Saharan Africa will probably reach 5 percent in 2010 and 5.9 percent in 2011, the IMF said on July 8. That compares with 2.6 percent expansion in 2010 and 2.4 percent in 2011 in advanced economies, according to the IMF.
Wal-Mart will hold exclusive talks with Massmart while a number of conditions are met, including due diligence studies, the South African company said. The retailer said “there can be no certainty” that the talks will lead to a formal offer.
“It’s early days,” CEO Pattison said. “We haven’t been in deep discussion” about Massmart’s growth strategy. He said he has “no intention of not being part of any transaction.”
Deutsche Bank AG and Goldman Sachs Group Inc. are advising Massmart on the transaction, Pattison said. Rothschild is advising Wal-Mart, according to company spokesman Kevin Gardner.
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