Mitchell Slape, outgoing Massmart CEO, failed to keep shareholders on his side with what looks like a coherently laid out turnaround plan for Walmart’s ailing SA subsidiary.
The solution: pitch a R6.4bn bid to buy out minority shareholders and take the business private, away from the scrutiny of the analysts and investors who have largely lost patience with the retailer that trails rivals operationally and in the stock market.
Earlier this week, Slape, who became the first Walmart insider in 2020 to run the company since the US firm forked out $2.3bn (R39bn in today’s money) for a controlling stake a decade ago, announced that Walmart has offered R62 per share for the remaining 47% stake in the company. Taking into account where the share was trading the day before the announcement, the offer is at a generous 53% premium.
The bid, which overshadowed an earnings report that painted a grim picture of Massmart equity as a place to expect decent investment returns, delivered an immediate value uplift. Massmart’s share price rocketed more than 45%, lifting its market capitalisation to more than R12bn.
It’s easy to sympathise with the reasoning behind Walmart’s decision to propose the buyout. For the immediate future, there’s little to attract more investors into the group after the turnaround plan was thrown off course by the July 2021 riots, KwaZulu-Natal’s worst floods in a generation and Covid-19 lockdown. The plan includes cutting jobs, flogging money-losing Cambridge grocery chains, returning the flagship Game chain to its roots as a general merchandise retailer, and shutting down Dion Wired.
For evidence of lack of near-term catalysts for the share price, look no further than Massmart’s half-year earnings report, which dropped alongside the buyout proposal. It posted a R1.1bn loss in the six months to end-June, more or less as bad as for the previous matching period. Except that in 2022, SA had rolled back virtually all lockdown restrictions, a development that in theory should have at least helped Massmart narrow the losses.
Even so, it’s difficult to shake the feeling that the offer is laced with cheekiness and a whiff of opportunism. Some Massmart shareholders, which include the custodian of more than R2.4-trillion in government employee pensions, the Public Investment Corporation (PIC), will have a hard time swallowing an offer less than half of what the shares were fetching just three years ago, and a slight discount to the levels of less than a year ago.
The offer has the board’s backing. Chair Kuseni Dlamini said at an analyst presentation that it concurred with independent expert opinion from PwC’s corporate finance arm that the terms and conditions of the bid are fair and reasonable.
However, to date the deal has the backing of investors holding only a quarter of the group’s R12bn equity. One thing that typically reflects investor concern about the fate of merger & acquisitions is the discount at which the share trades to its announced deal price. Massmart shares may have rallied in the wake of the announcement, but they still change hands at about R58, a discount of 6% to the offer price, a sign in most cases that traders remain unconvinced the deal is likely to close at the present price.
The spread could prompt some shareholders to launch a push for a sweetened offer. But it’s unlikely that Walmart will cave in despite its deep pockets and determination to give SA-born new CEO Jonathan Molapo a fighting chance to run the business without distraction from investors driven by short-term gains.
Investors who feel that the offer is opportunistic — and that Massmart’s fall from grace is down to Walmart-supervised strategic blunders to go into the fiercely competitive grocery and fresh food retail market dominated by Shoprite, Pick n Pay and Woolworths — will be annoyed by that stance.
Yet, faced with the alternative of pumping money into the company via a rights offer to fund the turnaround and Massmart’s aggressive push into e-commerce, they will be left with little choice.
Correction: September 1
Republishes to clarify that Mitchell Slape made the announcement that Walmart had pitched the offer for minorities. Also to make it clear that Walmart supervised the Massmart strategic blunders rather than drove the company into them. Business Day apologises for the error.
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