Wal-Mart Offers to Buy South Africa's Massmart for $4.2 Billion

By Sarah Shannon, Nasreen Seria and Matthew Boyle - Sep 27, 2010

Wal-Mart Stores Inc., the world's largest retailer, plans to buy Massmart Holdings Ltd. in a transaction worth about $4.6 billion, entering Africa in its biggest deal in more than a decade.

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."

Shares Gain

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."

Global Reach

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.

Right Market

"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.

OCT 1, 2010Wal-Mart (NYSE:WMT) announced on Monday that it intends to acquire South African retailer Massmart Holdings (MSM) for 32 billion rand ($4.6 billion). The U.S. retail behemoth has been battling weaknesses in the domestic market where its core low-income customers have remained financially strained due to the stubbornly high unemployment, and some of the affluent shoppers it gained during the recession have traded back up to higher-end stores. Wal-Mart stores in the U.S. have posted five consecutive quarters of same-store sales decline, and the company is looking to its international division to drive further growth. In fact, its international business reported a 7.3% increase in sales and a 12.7% increase in operating income, excluding currency impact, during the second quarter. In contrast, its U.S. business remained flat and operating income fell by 0.2% over the same period.

Although the Massmart deal is small relative to Wal-Mart's size, representing just over 2% of Wal-Mart's market cap, it presents significant growth opportunities for Wal-Mart. Acquiring Massmart, the 3rd largest retailer in South Africa, will give Wal-Mart a strong foothold to expand in South Africa and potentially into the broader part of the continent. Africa's fast-growing markets where GDP growth rates are more than twice that of developed economies are an increasingly attractive target for foreign investors. However, the economy is plagued by high crime rates, political instability, a heavily unionized work force and high unemployment rate.

While sales and earnings growth is nice, it does not always promise shareholder value creation. Wal-Mart said it would pay 148 rands per share for Massmart, which would represent a premium of about 10% over Thursday's close of 134.75 rand. To dig into what Wal-Mart's offer means and better understand the embedded expectations of the share price, we will utilize AFG's Value Expectations framework.

The 3 charts below highlight MSM's value drivers: Sales Growth, EBITDA Margin, and Asset Turnover. In order to frame whether the transaction makes sense or not, we will back into an answer that describes the sales growth Wal-Mart must achieve from Massmart in order to make this deal work out for existing WMT shareholders. We will first begin by determining a reasonable estimate of MSM's sustainable EBITDA margin and then estimate how much capital MSM needs to sustain its sales level. Lastly we will compute the sales growth required to justify the 148 rands a share price Wal-Mart has agreed to pay.

Looking at the historical EBITDA margins in the chart below, MSM has consistently improved its EBITDA margins from 2.0% in 2000 to 5.3% in 2009, peaking at 5.5% in 2008. For our analysis, we will assume the 3-year median of 5.3% to represent MSM's normalized long-term EBITDA margin. Given Wal-Mart's purchasing scale and reputation for operating efficiency, 5.3% may be a conservative assumption. Next, we assume a 3-year median Asset Turnover ratio of 3.52 for MSM, implying that MSM must invest a dollar in assets to generate every $3.52 of sales. This is a reasonable assumption given that MSM has seen consistent improvement in its asset efficiency ratio, from 3.31 in 2006 to 3.62 in 2009.

Solving for sales growth, MSM needs to grow its top line by 20.8% each year over the next 5 years to justify the 148 rands share price. Although MSM's sales growth averages 15.5% over the last ten years, the embedded expectations are rather high. To date, Wal-Mart has not released much detail on the proposed acquisitions, or provided any targets for revenue and cost savings, but we believe Massmart may benefit from Wal-Mart's global supply chain and large buying power. In addition, Massmart's low margin structure relative to Wal-Mart leaves a lot of room for margin expansion. In the last five years, Massmart's EBITDA margin averages 4.9%, versus Wal-Mart's 6.5%. Bottom line, to justify the share price offered to Massmart, Wal-Mart has to leverage its retail and operational know-how, and grow its top-line at 20.8% for the next five years.

click to enlarge

Jan 17, 2011:JOHANNESBURGShareholders in South Africa's Massmart Holdings Ltd. agreed Monday to sell a controlling stake in the African retailer to Wal-Mart Stores Inc. WMT+0.28% for $2.39 billion.

The proposed acquisition marks the Bentonville, Ark.-based retail giant's first foray into the growing sub-Saharan African market. However, the deal faces opposition from labor unions concerned at what the possible "Walmartization" of the local retail industry.

Shareholders voted almost 98% in favor of a deal to sell a 51% stake in Massmart to Wal-Mart at 148 rand ($21.39) a share, the company said. The transaction needed the support of at least 75% of Massmart shareholders.

"This is an important milestone and we now await the decision from the competition authorities," said Grant Pattison, chief executive of Massmart, adding the Competition Commission is expected to make its recommendation this month, followed by a Competition Tribunal hearing.

Massmart operates several wholesale and retail chains, including Game general-merchandise stores, Builders Warehouse for construction and Makro warehouse-club stores. The bulk of the company's 288 stores are in South Africa, although Massmart also operates in 13 other sub-Saharan countries.

The South African Commercial, Catering and Allied Workers Union, which held a press conference outside the venue where Massmart shareholders voted, said it will challenge the planned takeover through competition law and "in the political realm." It said it would also "directly educate" its membership about the implications for workers, accusing Wal-Mart of being antiunion.

"Despite the advent of democracy in 1994, South Africa remains one of the most inequitable societies in the world, said Tyotyo James, deputy-president of the Congress of South African Trade Unions. "The acquisition of 51% of Massmart by Walmart will cut out even more local ownership of one of the major retail players in the country."

Massmart said it and Wal-Mart have provided labor unions with numerous assurances the companies will continue to honor all existing union agreements and South African labor law if the deal goes ahead. It said Saccawu represents 41% of its employees.

May 31, 2011:South African antitrust authorities approved Wal-Mart Stores Inc. (WMT)'s 16.5 billion rand ($2.4 billion) takeover of Massmart Holdings Ltd. (MSM) with the same conditions proposed by the retailers, angering labor unions.

The companies must ensure no jobs are cut for two years and that existing labor agreements are honored for three years after the purchase, the Pretoria-based Competition Tribunal said in an e-mailed statement today. Wal-Mart and Massmart should also establish a 100 million-rand supplier-development fund, it said.

"This was a very important test case" for foreign direct investment into South Africa, said Peter Attard Montalto, an economist at Nomura International Plc in London. "All this will go to show whilst South Africa is open for business, the costs and difficulties of investing are great."

South Africa's government and labor unions, who helped sweep President Jacob Zuma into power, opposed Wal-Mart's entry into South Africa on concern it may result in job losses, raising criticism from opposition parties that the country could deter foreign investment. South African government departments also tried to halt the takeover by Japan's Kansai Paint Co. of Freeworld Coatings Ltd., which won conditional antitrust approval last month.

Wal-Mart Win

The Congress of South African Trade Unions, the nation's biggest labor federation, will encourage its 2 million members to boycott Wal-Mart stores and hold demonstrations and pickets in protest of the decision to approve the transaction, Cosatu spokesman Patrick Craven said in an interview broadcast on Johannesburg-based e-News Channel.

"It's a victory for Wal-Mart," he said, adding that Cosatu wanted more "concrete" conditions on the use of local suppliers imposed on the retailers for fear that Wal-Mart will use its buying power to boost imports, harming local industries and suppliers. Zuma's administration has pledged to create 5 million new jobs over the next decade to cut the nation's 25 percent unemployment rate.

Wal-Mart rose 52 cents to $55.22 at 4 p.m. in New York Stock Exchange composite trading. Massmart rose 1.8 percent to 142.56 rand by the 5 p.m. close in Johannesburg, extending its gains over the past 12 months to 21 percent. The rand strengthened 1.8 percent to 6.8172 per dollar.

Adding Jobs

Wal-Mart, the world's largest employer with 2.1 million workers, will expand Massmart's South African business, adding to jobs, Andy Bond, Wal-Mart's executive vice-president responsible for the U.K. and Africa, said on May 11 at hearings held by the Competition Tribunal. It aims to use its 51 percent stake in Massmart, which has almost 300 stores in 14 African countries, to lead its expansion in sub-Saharan Africa.

"The big deal is Africa," Chris Gilmour, an analyst at Johannesburg-based Absa Management Ltd., said. "The continent is the flavor of the month for investors."

The acquisition of Massmart, South Africa's largest wholesaler, is Wal-Mart's second-biggest after the $11 billion takeover of U.K. retailer Asda in 1999. In terms of the antitrust conditions, the retailers will give preference to 503 workers Massmart fired last year when it starts rehiring employees, the companies said in a statement.

The transaction will be closed in "a matter of a few weeks," Wal-Mart International Chief Executive Officer Doug McMillon said on a conference call. Massmart will now start opening new stores in Africa, he said.

More Aggressive Dividends

Massmart Chief Executive Officer Grant Pattison said on May 9 that the company plans to expand trading space by 20 percent over the next three years. Growth in floor space will boost sales by a similar margin and will also increase jobs while securing current posts, said Pattison. Its food business will expand by more than 50 percent over the next 5 years, the companies said.

Massmart is "geared toward" opening between 50 and 100 stores in the next three years, Pattison said on the conference call with reporters. The combined entity will spend about 1 billion rand a year on capital expenditure while seeking to enter the Democratic Republic of Congo and Senegal.

"We will be slightly more aggressive on investments and dividend payments," Pattison said. The Competition Tribunal's decision should give confidence to the investor community about South Africa as it showed that "we can rely on the rule of law," he said.

Mar 9^th 2012A South African court on Friday largely dismissed an appeal from government and unions to roll back approval for Wal-Mart's (WMT.N) $2.4 billion acquisition of retailer Massmart (MSMJ.J), ending months of uncertainty about the status of the deal.

The Competition Appeal Court shot down the government's request to have the deal re-examined, although it did rule that about 500 previously fired workers should be reinstated.

The ruling is likely to be seen as a victory for Wal-Mart Stores Inc in its plan to expand in fast-growing Africa. It is also likely to soothe investors, who had feared a retroactive ruling against the deal would tarnish South Africa's reputation as being open to foreign capital.

"Finally logic prevailed. Questions about how open South Africa is to foreign investment will still be there, but this ruling is a big positive for its image as an investment destination for foreign companies," said Nic Norman-Smith, a fund manager at Lentus Asset Management in Johannesburg.

"It's unfortunate that we had to go through all this, but the right decision was made in the end."

The Cape Town-based court rejected proposals that Wal-Mart should meet targets on using local suppliers, which the government said would protect jobs.

However, the court said 503 Massmart workers laid off directly before the acquisition should be reinstated, as their firing was "closely linked" to the merger.

Wal-Mart and Massmart have agreed to set up a 100 million rand ($13 million) fund to develop local suppliers, but the court said it was not clear whether that would be enough to project jobs.

It ordered Massmart, the government and labor union SACCAWU to set up a commission to study how small suppliers can best participate in Wal-Mart's supply chain.

"It's clear that the size of the fund is in question," said one South African competition lawyer, who declined to be identified because he was not authorized to speak to the media.

"I guess the study will determine if the fund is increased, or if the fund itself is the best way to protect suppliers."

NO MORE APPEALS

The government has no immediate plans for a further appeal, Economic Development Minister Ebrahim Patel told reporters.

"We welcome the judgment. We welcome the fact that it endorses some of the central concerns that government expressed during the course of the legal proceedings," he said.

Patel's was one the three government departments that lodged the original appeal.

South Africa's anti-trust regulator, the Competition Tribunal, in May approved Wal-Mart's bid for 51 percent of discounter Massmart Holdings with token conditions. That prompted the government and the main service workers union, SACCAWU, to launch their separate appeals.

The state's case centered on procedural issues during the May hearing, such as government access to Wal-Mart documents and an alleged lack of time for cross-examination.

"Neither of these arguments justified the setting aside of the Tribunal decision," the court said in its statement on Friday.

A Massmart spokesman said the company welcomed the decision. Wal-Mart and Massmart have said they plan further expansion in Africa, aiming to gain a bigger slice of the small but fast-growing middle class.

Massmart plans to double food sales in Africa in the next five years, pitting it against established grocery retailers such Shoprite (SHPJ.J) and Pick n Pay (PIKJ.J).

A handful of SACCAWU members picketed outside the court where they did the "toyi toyi" dance made famous during the anti-apartheid struggle.

"I think this is something we can welcome on the question of conditions," SACCAWU spokesman Mike Abrahams told reporters. "The judgment says they are not satisfied with the conditions that the Tribunal has agreed upon."

1)(4 pts)According to the readings provided about Walmart's acquisition of Massmart, briefly explain the potential motive for Walmart to acquire Massmart.

2)(4 pts) According to the readings provided about Walmart's acquisition of Massmart, briefly explain who was the major opponent to WalMart acquiring Massmart and why?