Walmart Inc. has made an offer for the remaining 47% of South African retailer Massmart that it does not already own in the amount of 6.4 billion rand ($377.6 million), valuing it at a premium of more than 50%.
Following the company’s announcement of the news on Monday, Massmart’s shares increased 46% as its chairman Kuseni Dlamini said that the offer seemed “fair and acceptable.”
The largest retailer in the world paid $2.3 billion for a 51% stake in Massmart in 2010, with the intention of using South Africa as a platform to capture a piece of the so-called “Africa growth story.”
However, it has since suffered in the face of fierce competition from highly successful local retailers like Shoprite and Woolworths, which has limited the company’s plans to expand deeper into Africa and reduced its market value by about three-quarters over the past ten years.
Walmart has offered 62 rand for each outstanding share of Massmart, a premium of 53% over the stock’s closing price on Friday, the retailer said, adding that if accepted, the deal will de-list the business.
According to Massmart Chairman Dlamini, the agreement will enable Walmart to make “substantial more financial investment” and “further operational participation.”
Massmart, which sells a lot of luxuries like clothing, housewares, and seasonal goods, has encountered a number of difficulties lately, causing Walmart to provide financial assistance and convert loans into equity.
The management of Massmart started a rescue strategy in 2019 that involved selling non-core assets, but it was insufficient. Walmart’s financial support for the company deepened when it invested 4 billion rand during the pandemic.
Civil upheaval, store floods earlier in the year, and most recently inflation occurred after the COVID-19 crisis.
According to a statement from Massmart, if the possible offer is accepted, it will give the company access to continued financial and operational support.
Having poured billions of dollars into the business, analysts and bankers said it would be difficult for Walmart to withdraw at this time, especially given that competitors have demonstrated how lucrative the South African retail sector is.
Its competitors have been reporting gross profit margins, a crucial indicator of a retailer’s success, of up to 36%, which is almost twice as high as Massmart’s.
Walmart likely reasoned, “Well, why shouldn’t we get the benefit of it and let’s just go the full hog and take the rest of the shares out,” said Sasfin Wealth senior equities analyst Alec Abraham. “Considering the support that they (Walmart) have to give Massmart in this process.”
According to a banker who has previously provided advice to Massmart, Walmart may continue to invest in the retailer until it is able to turn it around because the amount it has been putting in Massmart is a small portion of the parent company’s yearly revenues.
Since he is not a part of the arrangement, he declined to be named.
From a loss of 358.5 million rand a year earlier, Massmart’s losses increased to 903.5 million rand in the 26 weeks that ended on June 26.
