Walmart launched a R6.4bn buyout bid for minority holdings in Massmart on Monday, sending shares in the struggling SA subsidiary skyrocketing and underlining its renewed commitment to one of Africa’s most lucrative retail markets.
Walmart will pay R62 a share for the 47% stake it does not already own, a 53% premium to the closing share price on Friday and a 68.7% premium to the 30-day volume-weighted average price, up until the day before the announcement.
Massmart’s share price closed 44.85% higher at R58.68 as investors jumped in to profit from the gap between the R40.51 close on Friday and the offer amount. If accepted, the offer values the stake at R6.4bn — a valuation hailed by Massmart chair Kuseni Dlamini as a vote of confidence in SA by the world’s leading retailer.
Walmart bought about 51% of the owner of Game, Makro and Builders for R148 a share in 2010, a far cry from the share price before Monday’s offer. The retail business has lost money for three consecutive years as its flagship Game chain struggles to compete in a market that boasts formidable players such as Shoprite and Takealot.
The group announced a headline loss of R903.5m in the six months to June 26.
Walmart, which also announced the departure of Mitchell Slape as CEO at year end, had already acquired additional equity as part of a R2bn loan-for-equity scheme implemented in December to shore up the struggling retailer’s finances and tackle the cash flow crunch.
Massmart said in a statement that the ownership and delisting will allow it to stick to its turnaround plan and to keep investing in the loss-making group, which requires constant capital, while divestment from noncore assets continues. It is closing 15 nonperforming Game stores in SA and selling all 14 of them in East Africa.
The group said the buyout will reward shareholders now, while it takes a long-term view and continues to drive its e-commerce strategy in the face of increased competition. Amazon Marketplace is set to open in SA in 2023 and Takealot remains the clear market leader of online retail.
Massmart’s online investments are part of a central strategy to unlock value and to take advantage of its store footprint, as many consumers prefer to order online and collect in-store.
That CEO job will be left to SA-born Jonathan Molapo, who joined Massmart in January as COO and will take over from Slape in December.
Molapo has worked in the energy sector in Ghana and Kenya, where he was chair of the Total board. From 2018 to 2021 he was CEO of Astron Energy, the owner of the Caltex petrol station licence in SA.
Slape said Walmart is first ensuring things are stable in its base market in SA but could still expand on the continent with online retail. “Certainly, our e-commerce efforts and ambitions will move into the rest of Africa in time as well.”
Sasfin analyst Alec Abraham said the Walmart offer took him by surprise as “generally when the going gets tough in their core markets, retailers tend to focus their efforts at home”.
Inflation
Walmart is facing inflation in its US home market and excess inventory worth tens of billions of dollars, which it is selling at discount prices while reporting lower-than-expected earnings.
Abraham said he did not expect Walmart to throw in the towel after it had given Massmart so much support.
Walmart’s continued support includes R4bn in loans, introducing “Walmart insider” Slape to fully leverage the buying power and retail expertise of Walmart, and bringing in both a logistics and an e-commerce expert from the US.
All Weather Capital analyst Chris Reddy said Walmart is being opportunistic as it is paying far less per share than when it bought just more than half of Massmart in 2010 for R148 a share when the rand was much stronger.
The Massmart board said PwC had considered the potential offer and found the price “fair and reasonable”. Engagements with shareholders had shown there was support for the potential offer from 11.3% of the ordinary shares representing about 24.6% of the outstanding ordinary share register.
Walmart faced an onerous competition approval process in 2010 when buying the majority stake in Massmart. But the buyout deal is unlikely to require competition authority involvement as Walmart is already the majority owner, said Slape.
“The understanding that legal advisers have shared with the independent board as well as with Walmart is that the transaction will not be subject to competition [authority] approval. And that’s to an extent a function of the fact that Walmart is the majority shareholder of Massmart.”
Update: August 29 2022
This article has been updated to reflect Walmart acquired additional equity in December and not additional shares.
Slape’s full quote, explaining that competition authority approvals will not be required in the transaction, has also been added.
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