Wal-Mart bids for S. African retailer

Analysts see risks in focus outside of US

Wal-Mart’s push to expand in an emerging market comes as it posted its fifth consecutive quarter of declines in revenue at stores open at least a year in the US. Wal-Mart’s push to expand in an emerging market comes as it posted its fifth consecutive quarter of declines in revenue at stores open at least a year in the US. (Wal-Mart Stores Inc. via Associated Press)
By Anne D’Innocenzio
Associated Press / September 28, 2010

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NEW YORK — Wal-Mart Stores Inc. is offering to buy South African retailer Massmart Holdings Ltd. for about $4.25 billion in a bid to jump-start growth beyond its sluggish US business.

A deal would give the world’s largest retailer an opening to expand in South Africa, which has a fast-growing economy but is troubled by high crime and a 24 percent unemployment rate. It also has a heavily unionized workforce.

Wal-Mart has focused on expanding overseas, particularly in emerging markets, but South Africa had not been mentioned as a potential opportunity.

“South Africa possesses attractive market dynamics, favorable demographic trends, and a growing economy,’’ executive vice president Andy Bond said in a statement. Wal-Mart has sourced products there but doesn’t have a retail presence, company officials confirmed.

Wal-Mart said it would pay $21.11 per share for Massmart, which has 201.5 million shares outstanding, according to Thomson Reuters. Further details of the proposed deal were not disclosed.

Massmart is Africa’s third-largest distributor of consumer goods, the leading retailer of general merchandise, liquor, and home improvement equipment and supplies, and the leading wholesaler of basic foods. Massmart was founded in 1990 and operates chains including Game and Makro.

Shares of Massmart surged above Wal-Mart’s offer to $21.29, or 10.6 percent, yesterday. That’s an indication that shareholders are expecting a higher offer, either from Wal-Mart or another bidder.

Massmart said in a statement that its board will provide a recommendation to shareholders once a firm offer is made. The two companies have entered into an exclusivity period to allow for due diligence and other preconditions to a deal.

Wal-Mart’s overseas business makes up about 25 percent of its revenue, generating more than $100 billion in the fiscal year that ended Jan. 31. Last month, the discounter reported second-quarter results were helped by robust growth in China, Brazil, and Mexico.

“This is a visionary thing,’’ said Richard Hastings, macro and consumer strategist with Global Hunter Securities. “The transformation of South Africa is well underway.’’ He said he believes South Africa will be where South America is today in about seven to 10 years.

But Brian Sozzi, an analyst with Wall Street Strategies, was skeptical. “I’m surprised,’’ Sozzi said. “As a Wal-Mart shareholder, I would have a lot of questions. There seems to be too many moving parts. I think they should be fixing their own business in the US. There’s too much confusion over its strategy here.’’