BUSINESS
Wal-Mart Stores Inc's plan to buy its way into the South African market with a $4 billion acquisition is a pricey move that highlights how much the retailer is betting on growth outside the sluggish US markets.
Wal-Mart Stores Inc's plan to buy its way into the South African market with a $4 billion acquisition is a pricey move that highlights how much the retailer is betting on growth outside the sluggish US markets.
While it could take some time for an acquisition of South Africa's Massmart Holdings Ltd to pay off, analysts said the move is one the world's largest retailer - with a market capitalization approaching $200 billion and more than $10 billion in cash on the books at the end of July - could afford to make.
"They could pay for this and they could probably pay more than what it's worth to get the infrastructure and get the intelligence in the area," Wall Street Strategies analyst Brian Sozzi said.
Wal-Mart said on Monday that it was in talks to buy Massmart, South Africa's third-largest listed retailer, and has made a nonbinding proposal worth about 30 billion rand ($4.1 billion).
The bid is about 13 times Massmart's earnings before interest, taxes, depreciation and amortization, Janney Montgomery Scott analyst David Strasser said.
"We get their desire to use this as a springboard to grow, particularly in sub-Saharan Africa," Strasser said. But he added that such a price-tag for a deal in "very difficult and challenging markets" means returns would "lag for years."
He also noted that for the deal to drive returns, Wal-Mart would need to use Massmart to move into other countries in the region -- some of which have economic and political risks.
"For every relatively stable country like Botswana, there is a Zimbabwe," he said.
South Africa itself, a country with about 25% unemployment, might be a risky place for Wal-Mart to look to expand.
But Wal-Mart has made it clear that international growth is a top priority, especially in the wake of more than a year of declining US same-store sales at its namesake stores.
Wal-Mart's international sales rose about 11 percent last year, eclipsing $100 billion for the first time. International accounts for about a quarter of the company''s overall sales.
As a result, the company has focused its expansion efforts outside the borders of its home country. More than 60% of its new retail space was added internationally in the first quarter of this year. In the United States, the priority has been to remodel stores rather than build new ones.
"My expectation is to add customers, add stores and to grow Wal-Mart International at an even faster pace," chief executive officer Mike Duke said at a meeting of international employees in June.
Elsewhere, Wal-Mart has been looking for a way to enter Russia and has talked with several potential partners, Doug McMillon, Wal-Mart International's president and chief executive, said in June.
It is "planting seeds" in countries like Chile, Argentina and India, while also trying to grow existing operations in rapidly growing markets like China and Brazil.
So an acquisition in South Africa would be more of the same for Wal-Mart, Matt Arnold, analyst at Edward Jones, said, though he warned that investors would need to be patient.
"It's similar in nature to Brazil or China or Russia," he said. "It's one that does have long-term potential."
Wal-Mart would also have the advantage of being the first major multinational retailer to move into the region.
But that could be because the income demographics are not that attractive, Sozzi said.
"There's a reason why nobody else is going in there," Sozzi said.
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