Massmart reveals more detail on Walmart deal

September 1, 2022

Retail giant Walmart this week announced that it wants to buy the remaining shares in Massmart for R62 a share, having initially acquired a 51% stake in the South African business in 2010 at R148 per share – R16.5 billion.

Bloomberg reports that the offer represented a 53% premium to Massmart’s closing price prior to the announcement, while Walmart intends to take the business private by delisting it from the JSE.

Taking Massmart private may help Walmart cut costs and invest in the company that owns brands including Makro and Builders without the scrutiny that comes with being a public company, it said.

Massmart will also get a new chief executive in Jonathan Molapo, who joined Massmart in January as COO, replacing Mitchell Slape.

The group published its interim results for the period ended 26 June 2022 earlier this week, which reflected ongoing underperformance and the significant headwinds faced by each of its operating businesses, which could be compounded by the arrival of Amazon.com in the country.

“There is no question that Amazon is going to intensify competition in the market,” Slape said at a briefing on Monday (29 August). “We’ve been working hard to build our e-commerce business over the last few years. We think we’ll have a very competitive, very interesting offer for our consumers and you’ll see more of that in the coming months.”

Under Slape’s leadership, Bloomberg noted that the company had cut jobs, shut its Dion Wired chain, disposed of underperforming Masscash stores and stopped selling fresh food in household-goods chain Game.

“Walmart acquired control of Massmart in 2010, in what was then a landmark transaction in the South African consumer landscape.

“Over the past decade, however, Walmart has had to provide increasing levels of support across Massmart’s businesses. This support has deepened substantially in the period since the outbreak of Covid-19 in 2020,” Massmart said in a statement on Thursday (1 September).

During the mandatory national lockdowns in 2020, Massmart noted that Walmart injected a R4 billion facility into the group to shore up its liquidity. Walmart subsequently agreed to restructure half of this facility as equity in terms of International Financial Reporting Standards to shore up the solvency of the Massmart group.

Massmart launched a management-led turnaround strategy in 2019 but has faced many headwinds since – primarily Covid-19 but also the civil unrest in 2021, which resulted in a loss of operations and disruptions to the supply chain on certain key inventory lines, flooding experienced in parts of the country, weak consumer demand for general merchandise and an increasingly competitive operating environment.

In its latest financials, Massmart reported a first-half net loss of R1.1 billion, widening from a loss of R1.09 billion a year earlier. The company also has R14.9 billion of debt as of December 2021, according to data compiled by Bloomberg.

The group said that the ongoing divestiture of non-core assets, although crucial to the long-term strategy of Massmart, will have a negative impact on the profit and loss of the group in the short term and will require additional capital investment into the business.

“In addition, the implementation of Massmart’s business plan includes, inter alia, the ongoing development of its e-commerce strategy, which will require further intervention operationally and significant additional financial investment,” it said.

“Walmart and the Massmart Board are of the view that the proposed transaction will enable Walmart to continue its overweight support as a long-term shareholder and allow eligible
Massmart Shareholders the opportunity to realise value now.”