Wal-Mart Makes a Grand African Entrance: Wal-Mart, the World's Largest Retailer and, According to Some, the Biggest Company in the World, Is, Bar the Shouting, Coming to Africa. the Combination of Cheap Prices, Convenience and a Listening Ear Could Transform Africa's Shopping Habits as Has Happened Elsewhere. but, as Tom Nevin Reports, Not Everyone Is Enthusiastic about This Development
Nevin, Tom, African Business
AFRICAN RETAILERS, LABOUR UNIONS, manufacturers and shoppers are awaiting with some trepidation the appearance of the US retail giant Wal-Mart on the continent's high streets following its gobbling up of Massmart, an Africa-wide multibrand conglomerate. After a last-minute tactical change of direction, Wal-Mart switched its offer from a total buyout to a controlling 51% stake in order to mollify Massmart shareholders and ensure its continued trading on the Johannesburg Securities Exchange.
In the coming months, Africans will be exposed to an alien way of doing business as a slice of the American shopping experience opens in Africa's towns and cities.
Wal-Mart, the quintessential US retailer with Mom-and-Pop general store roots, will have control of 376 stores Africa-wide in a $2.1bn cash offer for the Massmart brands.
For Wal-Mart, the price is little more than small change. It represents a few days' takings in buying Africa's third-biggest chain store operation establishing itself continent-wide in the process. Wal-Mart's bid is described as "a bold move to stake out its claim in Africa - the next frontier in global retailing".
Piggybacking on Massnart's business makes African expansion a much less risky proposition for the US corporation. Africa's combined consumer spending is forecast to reach $1.4 trillion in 2020.
Wal-Mart's offer represented a 19% premium to the share's 30-day weighted average price and values 51% of Massmart at about R17bn ($2.6bn in mid-December). The purchase consideration includes a royalty fee.
In addition to ordinary dividends, Mass-mart will in time pay Wal-Mart a return, or royalty, on 'super' earnings. It is calculated on Massmart's return on invested capital (ROIC), and takes as a benchmark the 36% that Massmart earned in 2008 - its highest level ever. Returns above this level will be split by the two companies on a 50/50 basis. Massmart's current ROIC is 27.4%. There is a three-year grace period before the annual royalty, if any, becomes payable. The initial agreement is for five years and thereafter can be renegotiated or renewed automatically.
"The South Africa and sub-Saharan markets are important ones to us," says Andy Bond, Wal-Mart executive vice-president for Europe and Africa, and former chairman of UK retailer Asda, who will be overseeing the takeover for the next three months before leaving the company. "We feel good about the opportunities. The investigation of Mass-mart was a thorough affair. It reassured us that this was a fantastic company with great opportunities," says Bond.
Focus on growth?
At an offer of R148 ($2.2) a share, the acquisition is one of Wal-Mart's most expensive, leading analysts to believe that the focus is more on growing revenue and operating profit than a return on investment.
Massmart is currently the third-largest distributor of consumer goods in Africa, making the company a strategic regional acquisition for expansion into the African market. But it is not only in the retail sector that South African companies dominate; they also have a large footprint across Africa in other services sectors such as business services, engineering, construction, telecommunications, banking and tourism. Game Stores, for example has operations in Botswana, Ghana, Malawi, Namibia, Mozambique, Zambia and elsewhere. Other well-known brands include Makro, Dion Wired, Builders Warehouse and Jumbo Stores in Southern Africa.
Paul Kruger, a researcher at tralac (Trade Law Centre for Southern Africa), ponders how many of these companies are truly regional and if decisions are made by foreign shareholders based outside of southern Africa.
The fact that South Africa is a member of the Southern African Customs Union (SACU) opens the duty-free potential sales scope across a much wider territory, encompassing Botswana, Swaziland, Lesotho and Namibia. …