There may have been some who expected Wal-Mart to try to buy its way into the South African market through an acquisition, but most seem to have been taken off guard by the company's non-binding offer to acquire Massmart for around $4.8 billion in cash.
Massmart, which The New York Times described as a cross between Home Depot and Wal-Mart, is the third largest retailing company in South Africa. It is the largest food retailer in the region with stores in 14 African nations below the Sahara.
Doug McMillon, president and chief executive of Walmart International, said in a statement, "We have the opportunity to leverage our experience from around the world to more effectively serve customers, create opportunities for our associates and add shareholder value. ...This region of the world fits with our focus on large, high growth markets. This potential combination with a market leader will enable us to add value to an already successful business through investments in people and technology."
Brian Sozzi, an analyst with Wall Street Securities, described the bid as coming out of "left field," in a research note.
"Though Massmart would benefit from the Wal-Mart know-how and its best of class supply chain, the margin structure (18.1 percent) is well below Wal-Mart at around a 24 percent gross margin and a six percent operating margin," wrote Mr. Sozzi. "Keep in mind the South African retail marketplace appears highly competitive, maybe becoming more so if Wal-Mart decides to undercut competitors further on price as it does in the U.S."
Mr. Sozzi expressed concern that the acquisition attempt could lead Wal-Mart to to take its eye off of challenges in the U.S. market as well as in the U.K., where its Asda division is rebounding, and in Japan, where it "has finally gained traction" with Seiyu.
Should the MassMart deal go through, Wal-Mart would find itself managing an organized workforce. Mr. McMillon said, "We respect and honor pre-existing union relationships and are committed to abiding by South African labor laws. We also look forward to serving communities and working with the leaders to support the continued development and momentum in the region."
South Africa's largest labor union has come out against the deal, according to a Wall Street Journal report. The Western Cape provincial arm of the Congress of South African Trade Unions (Cosatu) said in a statement, "We will oppose the setting up of any Wal-Mart stores in the Western Cape. These companies are notoriously antiunion and anti-workers' rights."
Discussion Question: Would an acquisition of Massmart be a good or bad move for Wal-Mart Stores at this time?