Wal-Mart Plans to Enter African
Market
The discount retail giant, Wal-Mart Stores, announced plans on Monday to enter the African
market, with a preliminary offer to buy the Johannesburg-based retailer, Massmart
Holdings, for about $4.2 billion.
While Wal-Mart operates in 14 countries in addition to the United States, it has no stores
in Africa.
The retail giant has emphasized international sales,
which make up about a quarter of its revenue, as sales in the United
States have gone soft. Sales at stores open at least a year have decline
for five consecutive quarters in the United States. Wal-Mart has used a variety
of approaches in other countries, like opening Sam’s Clubs and Supercenters
in China ,and Brazil, and buying stakes in existing retailers in Chile and El Salvador.
Massmart can be described as a combination of Wal-Mart
and Home Depot, selling general merchandise and home-improvement
supplies in 13 sub-Saharan African countries, though most of its operations
are in South Africa. It is also the biggest retailer of basic foods
in the region. Sales for its most recent fiscal year, ended in June,
were 47.5 billion rand, or about $6.8 billion, up 10 percent from the
previous year.
The company has 232 stores in South Africa, and 24
additional stores in other sub-Saharan African countries, including
Builders Warehouse, which focuses on home improvement; Makro, a warehouse
store; and CellShack, which sells cellular phones.
“South Africa presents a compelling growth
opportunity for Wal-Mart and offers a platform for growth and expansion
in other African countries,” Andy Bond, a Wal-Mart executive who oversees
the region’s operations, said in a statement.
Analysts, however, were skeptical and questioned
whether the purchase would be the best use of Wal-Mart’s $10.2 billion
in cash.
David Strasser, an analyst for Janney Montgomery
Scott, noted that the proposed purchase price was high, at 13 times
earnings before interest, taxes, depreciation and amortization. “Returns
will lag for years to come,” he said in a note to clients, and Massmart
was relatively far along in South Africa, which he believed had the
best economy on the continent, so would need to grow in the other countries
where it does business.
Colin McGranahan, an analyst at Sanford Bernstein,
noted that the proposed price — 148 South African rands a share —
was about a 10 percent premium over Massmart’s closing price before
the offer was announced.
“Investors may have reservations about the company’s
decision to pursue acquisitions in a new part of the world, particularly
at such high multiples and when Wal-Mart’s own stock is trading at
a much lower valuation,” he said in a note to clients. “Although
the acquisition is modest compared to the size of the overall company,
it may disappoint people hoping that the company would begin to return
more capital to shareholders.”
The chief executive of Massmart, Grant Pattison,
said that the company was first approached by Wal-Mart on Friday, and
Massmart’s board met on Sunday to discuss the proposal.
The offer is preliminary and non-binding, meaning
that Wal-Mart is beginning to conduct due diligence, could back out
at any time, and has not made a formal offer requiring shareholder approval.
“We are at the beginning of a process,” Mr. Pattison
said in a video posted on Massmart’s Web site. “The next step is
to complete the due diligence and thereafter we will seek regulatory
and shareholder approval.”
Wal-Mart and Massmart representatives declined comment
beyond what was posted to their company Web sites.
What's Next for Stocks, M&A, and the Dollar?
From rising stocks and the weakening dollar
to an uptick in takeover talk, Wall Street experts weigh in
Is the bull showing signs of fatigue?
Investors might begin to wonder, especially after the benchmark Standard
& Poor's 500-stock index advanced an additional 2.5% last
week, bringing its total rise since March to 58%. The flip side of the
equity rally has been a steady decline in the dollar vs. other major
currencies, another widely discussed topic on Wall Street.
BusinessWeek
compiled comments from Wall Street strategists and economists on these
and other topics on Sept. 21:
Tobias Levkovich, Citigroup
The S&P 500's surge already
reflects an impressive industrial recovery. Indeed, we suspect that
investors are allowing stock prices to get ahead of themselves, and
this suggests a growing risk for a market correction even as it does
not rule out a possible further overshoot by latecomers who feel worried
they have missed the potential for additional appreciation.
While one can assume that a powerful
industrial production recovery will occur after the sheer collapse earlier
this year, one should not presume that the market has not yet figured
that out. In discussions with investors, we find many arguing that they
have concerns about the economy's durability and if gross domestic product
growth is sustainable in the future.
Sam Stovall, Standard & Poor's
The takeover talk is picking up
once again, and that's not too surprising, in our opinion. Besides,
what else are companies going to do with all that cash on hand? According
to S&P's Index Services, which operates independently of S&P
Equity Services, cash on the books of nonfinancial companies in the S&P 500 hit a record
of more than $700 billion as of June 2009, up more than 8% in the past
year and 16% above the level of two years ago.
As a result, blue-chip companies
are flush with cash and likely to put it to work, in our opinion. Yet
a meaningful pickup in merger-and-acquisition activity hasn't really
materialized, since the $310.38 billion in global transactions year
to date through Sept.18 is the lowest quarterly level in the past three
years, according to S&P's Capital IQ, which operates independently
of S&P Equity Services.
In addition to the waiting period
ahead of the events, general equity weakness is perhaps contributing
to some of today's dollar resilience. And with speculative U.S. dollar
shorts also at their highest since March 2008, it is possible that market
positioning may become a more relevant factor for currencies. Overall,
this week could be a better one for the dollar than the last couple
have been, though it will not necessarily be a decisive one for the
dollar's longer-term trend.