After years of reporting losses in the glare of the public eye, Massmart this week announced plans to go private as a fully owned subsidiary of US retail giant Walmart, a surprise move the company and analysts say offers the best chance of turning around its flagging fortunes.
CEO Mitchell Slape, who will step down at the end of the year after three years at the helm, said Massmart would be able “to move faster” as a private entity.
“There are certainly a lot more regulatory requirements when you are a listed company and particularly when you are turning around a business.
“One of the big challenges with your minority shareholder base [is that] often they are looking for that short-term return in the quarter or half year and so having to continuously go back and ... review and explain every decision you are making in the turnaround is complicated.”
The main advantage of going private was that a big backer like Walmart owning 100% of the company would give the group the “financial ability to drive the turnaround to full completion while we invest in a big way for the future”, in store expansions and online platforms, Slape said.
Walmart “has already backed us tremendously” with its R4bn loan at the height of the Covid pandemic, converting a portion to “quasi equity to shore up our solvency” while retailers were contending with the civil unrest last year that wreaked havoc in KwaZulu-Natal and parts of Gauteng.
Asked whether Massmart’s brands would be rebranded, Slape said it was “hard for me to imagine changing the name of Builders or Makro or Game”, as they had a lot of brand equity.
Slape, who has worked around the world for Walmart for close to 30 years, was brought in to turn the SA business around in 2019, but the pandemic, riots and floods delayed the group's progress.
Jonathan Molapo, Massmart’s COO, will take over as CEO in January. He told Business Times in July that Massmart's turnaround was gathering momentum.
Barring external shocks, he hoped Massmart would see the positive effect of the changes it has implemented, particularly at Game where 115 stores have been refurbished.
There may be early signs that Game is turning the corner. In its results for the 26 weeks ended June 26, released this week, Massmart said Game’s core store gross profit margin increased by 74 basis points and its trading loss improved by 30.1% to R231m.
The group, which also owns Makro and Builders, said Walmart's offer this week of R62 per share, or R6.4bn for the 47% stake it does not already own, was a 53% premium on the 90-day volume weighted average share price at the close of market on Friday.
My view is that Walmart comes into the business with a view of investing for growth in e-commerce, in the store growth. That should actually yield more jobs rather than any job losses
— CEO Mitchell Slape
The company’s share price has more than halved since Walmart acquired its initial 51% stake for R148 a share a decade ago. That stake cost Walmart more than $2.5bn (about R18bn at the time).
All Weather Capital portfolio manager Chris Reddy said the buyout was “opportunistic” for Walmart as converting it to dollars meant it would acquire the remaining stake at an equivalent of $3.70 per share, compared to the $21 per share it paid for 51%.
“It is a lot cheaper than what they paid for the initial stake and that is a result of two functions; one is the share price having come off quite a bit and then the rand has depreciated by a significant amount.”
Massmart said it provided “immediate value” to shareholders especially as there were no “near-term catalysts” for a re-rating of the group’s share price amid a weak economy and constrained consumers who are contending with higher inflation and interest rates.
This environment was particularly affecting the general merchandise category that Massmart operated in.
The company reported a headline loss of more than R903m for the 26 weeks to June 26, while for the year to December 2021 it had losses of R2.2bn, after losses in the two previous years.
No job losses associated with deal were anticipated among its 35,000 employees in SA, the company said.
Slape said: “My view is that Walmart comes into the business with a view of investing for growth in e-commerce, in the store growth. That should actually yield more jobs rather than any job losses.”
Reddy said going private would free Massmart's management from some of the time-consuming analyst engagements that came with being a listed company and allow it more flexibility.
He said the offer was the best outcome for South African shareholders in the company.
Reddy said owning Massmart entirely meant Walmart would now enjoy 100% of any recovery at the company as it was funding the group’s turnaround and expansion strategy and taking on 100% of the risk.
“They are likely the only ones who are going to be injecting capital because the banks are going to be quite expensive to lend into Massmart given the current state of their finances. They were making losses for the past four years.”
He said one of the major attractions of listing was the ability of companies to raise equity, and if there were no other willing parties it defeated the purpose of being listed.
Sanlam Private Wealth portfolio manager Nick Kunze said the takeover was a “good sign”, indicating Walmart believed Massmart could be turned around.
Being off a public market will afford them greater latitude and flexibility in their strategy
— Genera Capital investment specialist Adrian Saville
“Clearly if you strip away the layers a little bit there is a business here. Even its Game brand, which has been a problem for years, is starting to perform better and maybe the worst is behind it. I do think it is a case of almost doubling down on the part of Walmart and that there is a business underneath all of this they could actually get right.”
Genera Capital investment specialist Adrian Saville said for the company to “implement the actions that are needed to get the business onto a stronger footing, it may well be better to take it out of the line of sight of the public market”.
“Being off a public market will afford them greater latitude and flexibility in their strategy.”
Kunze said it was probably the best deal for shareholders. Apart from Walmart, no-one would have wanted to buy out Massmart in a rising interest rate environment.
Massmart said Competition Commission approval was not required for the transaction as Walmart already had control over Massmart, which was approved in 2012.
Gryphon Asset Management portfolio manager and research analyst Casparus Treurnicht said a complete buyout of Massmart should have happened when Walmart first acquired a stake, but government interventions at the time, which included strict conditions around job protection, prevented this.
“Walmart, when they go in, generally like to buy out a whole company and then do things their way. But our government said you cannot do this or that and there were talks. This is a classic case of government interventions not working 100% of the time.”
Treurnicht said Walmart would not have made the offer “if a niche could not be identified for Massmart in SA”.
“It is a good thing that Walmart is taking it private instead of kicking the can down the road. It shows that it can be saved. It is an additional investment into SA by foreign capital, and there will be more.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.