Wal-Mart’s Massmart Deal Could Secure Foothold in Africa
Wal-Mart (NYSE:WMT), best known for its wide selection of merchandise at low prices, recently offered to buy 51% of Massmart Holdings Ltd. (Other OTC:MMRTY.PK) for 16.5 billion rand ($2.34 billion). [1] Massmart Holdings Ltd. is a South-African based management group that is the third largest distributor of consumer goods in Africa, a leading retailer of general merchandise and a wholesaler of basic foods. The deal is contingent on Massmart shareholder approval.
Wal-Mart competes internationally with other large retailers like Best Buy (NYSE:BBY), Target (NYSE:TGT), and major foreign regional players like Tesco (LSE:TSCO), Carrefour (Euronext: CA.PA), and Metro (XETRA:MEO.DE). The Massmart deal shows that its international expansion plans are focused on Africa as well.
We currently have a Trefis price estimate of $65.42 for Wal-Mart’s stock, which is 20% above current price. Wal-Mart’s international operations currently constitute around one third of our estimated intrinsic value for WMT. With Wal-Mart eying more international expansions, we calculate a 2% stock price sensitivity to a 5% change in our forecasted total of 2013 international stores.
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International Expansion
Wal-Mart sees more opportunity in emerging markets than in Europe, and with its potential stake in Massmart, Wal-Mart can gain a strong foothold in South Africa and the sub-Saharan market. Wal-Mart International CEO Doug McMillion recently announced that Wal-Mart is looking to expand internationally to supplement weakness in domestic same store sales, with China and Brazil being the most prominent opportunities. [2]
Wal-Mart is also looking to bulk up in developed retail markets like Japan where it operates more than 400 stores under the Seiyu banner. McMillion said the company may make “multiple acquisitions” over time to gain scale there.
Wal-Mart International has seen a steady increase in number of stores since 2005, growing from 2,290 to 4,112 in 2009. We project the number of Wal-Mart International Stores will grow from 4,390 in 2010 to 5,580 in 2014, representing almost an 8% CAGR, though if this grows to 6,100, it would add another 3.3% to our current Trefis price estimate of $65.42.
We note that the two countries cited by McMillion, China and Brazil, typically have lower revenue per square foot figures. Although growth in these regions is factored into our analysis, further upside could impact Wal-Mart International revenue per square foot.
We project a slight 3% decline in Wal-Mart International revenue per square foot to $384 in 2014 from $395 in 2010. A further 2% decline in 2014 revenue per square foot could reduce our WMT price estimate by 1%.
See our complete analysis for Wal-Mart here.
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