Wal-Mart Looks To The Long-Term

By Stephen D. Simpson, CFA | September 29, 2010 AAA

Give Wal-Mart (NYSE:WMT) credit, in a financial world obsessed with short-term rewards, this massive retailer is not afraid to make long-term investments. While investors will almost certainly continue to pay much more attention to its expansion in China, Brazil and India, Wal-Mart's proposed acquisition of South Africa's Massmart could pay dividends over the long run.
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The Details of the Deal
There is no finalized deal between the two companies, but Wal-Mart is proposing to pay about $4.2 billion for this retailer. That represents about a 10% premium for a company that had long been trading on expectations of a bid from foreign operators. In fact, Massmart's stock was trading a bit higher than Wal-Mart's proposed price - suggesting that investors expect some sort of higher bid to materialize.

Relative to American comparables, Wal-Mart is paying up for Massmart. If the deal goes through at Wal-Mart's proposed price of 148 rand per share, Wal-Mart will be paying about 0.65-times sales, 24-times earnings and about 12.9-times EBITDA. That is a 50% premium to the average grocery store industry P/E. Target (NYSE:TGT), for example, trades with a P/E of 15.03. (We look at a retailers' inventory turnaround times, its receivables as well as its collection period. To learn more about these metrics, read Measuring Company Efficiency.)

What Wal-Mart is Getting
For that money, investors might expect that Massmart has above-average growth. That is actually a somewhat complicated answer, though. Massmart had an exceptionally tough first half of its fiscal 2010, so the overall results will mask solid improvement in the second half. Nonetheless, total sales for the year grew by 10%. Going a step further, the company has reported that the first eight weeks of the current fiscal year have seen comp-sales growth of over 9%, suggesting that the company is back on a solid growth track.

Looking more broadly, Massmart is the #3 retailer in South Africa and operates 288 stores across 14 countries. That stat is a bit deceptive, though, as only 24 of those stores are outside of South Africa, and the company has just barely begun to expand into countries like Uganda, Nigeria and Ghana.

The Bigger Picture
This deal is all about what the African retailing opportunity could become, as opposed to what it is today. Wal-Mart's China operations, for instance, already have over 290 stores, and Wal-Mart de Mexico (OTCBB:WMMVY) has over 1,500 retail units. What is interesting, though, is that Wal-Mart is expanding at a time when others like Carrefour are pulling back somewhat from their international expansion plans in some areas.

It may also be worth wondering just how this may affect the global growth plans of companies like Kraft (NYSE:KFT), General Mills (NYSE:GIS), Unilever (NYSE:UL) and so on. After all, Wal-Mart is an aggressive retailer and is not afraid to drive hard bargains with retailers. That raises the question, then, of whether these large global packaged goods companies really want to see their global growth aspirations crimped by Wal-Mart's own drive for profits.

The Bottom Line
For better or worse, this deal is just too small to make a difference in Wal-Mart's results today. On the other hand, it shows a level of forward-thinking that should encourage shareholders and perhaps rebut the arguments that Wal-Mart is too big to ever grow again.

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