Why Walmart’s total Massmart takeover could revive Makro and Game

Making Massmart a wholly-owned subsidiary of Walmart could give the retailer more operational flexibility to speed up the company’s turnaround, expand stores, and build out its online platforms.

That is according to Massmart’s outgoing CEO Mitchell Slape and several investment experts who spoke to Business Times about the deal’s potential impact.

Massmart first announced that it was in advanced discussions with its majority shareholder over a potential total takeover during the release of its latest interim results towards the end of August 2022.

As it stands, the terms of the deal will see Walmart acquiring the remaining 49% of issued shares at R62 each for a total cost of R6.4 billion (R374 million).

Should the deal get the green light, it will also result in Massmart’s delisting from the JSE.

Walmart bought a 51% stake in Massmart in 2011 for $2.3 billion, roughly R16.68 billion at the average exchange rate for that year. At the time, it paid R148 per share.

The share price had slumped by 80% since then, closing at R40.51 on Friday, 26 August 2022 before Massmart announced the potential takeover.

Several of the retail group’s brands have struggled to grow in recent years.

One of the contributing factors has been their inability to catch up in ecommerce, with players like Takealot making it more convenient and sometimes cheaper to buy many of the products offered by Massmart’s businesses.

Game has been a particularly troublesome problem child, while the company also had to shut down its high-end tech chain Dion Wired in 2020 after substantial sales drops.

The Covid-19 pandemic and July 2021 riots wreaked havoc on the company’s finances, with Walmart having to provide a R4 billion loan to help Massmart shore up its solvency.

That was in addition to the “overweight” financial support provided by the company in the past decade.

Slape told Business Times that going private would free the company from many more regulatory requirements, which are particularly burdensome when trying to turn 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,” Slape said.

Mitchell Slape
Mitchell Slape, outgoing Massmart Group CEO

Slape argued that going private with Walmart as the sole backer would give Massmart the financial ability to complete the turnaround while investing in in-store expansions and online platforms.

All Weather Capital portfolio manager Chris Reddy concurred, explaining a wholly-private Massmart could eliminate some time-consuming analyst engagements that formed part of listed companies’ responsibilities.

Reddy pointed out that one of the big drawing cards of listing was that companies could raise external equity.

But with the current state of Massmart’s finances, it would be expensive to lend from the banks.

Sanlam Private Wealth portfolio manager Nick Kunze said the potential deal was a good sign that Walmart believed in Massmart’s turnaround.

“Clearly, if you strip away the layers a little bit, there is a business here,” Kunze said.

“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,” Kunze added.

Game concept store header

One of the reasons Walmart could not initially buy out Massmart completely in 2011 was the government’s concerns over job losses.

But Slape said the takeover is being done with a view to invest for e-commerce and in-store growth.

“That should actually yield more jobs rather than any job losses,” he said.

Slape also told Business Times it was hard for him to imagine Walmart rebranding its Massmart stores following the deal, given that Builders, Game, and Makro carried a lot of brand equity.

Massmart and Walmart have already started discussions with shareholders about the potential offer.

By the release of its latest interim results on 29 August 2022, the holders of approximately 24.6% of the outstanding ordinary shares had expressed support for the transaction.

Now read: Massmart shares skyrocket following announcement of potential total Walmart takeover

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Why Walmart’s total Massmart takeover could revive Makro and Game