It probably ranks as the longest, most drawn-out takeover in SA corporate history. With luck, by the end of 2022 Walmart should be able to wrap up the purchase of the 47% of Massmart it doesn’t already own. That will be just over 12 years after the US retail giant first approached Massmart with an offer for 100% of the shares.
As it happens, share price valuations and exchange rate moves since 2010 mean Walmart will be getting the whole SA business for about 30% less than it initially intended paying for the 100% it wanted. What’s more, it’s a considerably larger business and one Walmart knows well, having spent at least three years aggressively cleaning it up.
In early 2010 word got out that Walmart was looking to get a slice of the fast-growing African market. Shoprite and Pick n Pay headed its target list, but strong controlling shareholders at those two groups discouraged Walmart. It was nudged towards Massmart.
In the group’s 2010 annual report, then CEO Grant Pattison referred to the nonbinding expression of interest received from Walmart on September 27 “which could lead to Walmart making a cash offer to acquire the entire issued share capital of our company for a price of R148 per share”. In November Walmart announced an offer, not for 100% but for 51%, which meant Massmart would remain listed on the JSE.
No formal explanation has ever been given for the change. Sources at the competition authorities at the time said various government departments were concerned about the potential impact on local suppliers of the arrival of a buying force as powerful as Walmart. A listing would at least allow for some scrutiny.
Everyone believed Walmart was going to use its gigantic purchasing power to reduce prices, grow market share and boost profits
— Syd Vianello
It’s a perception backed by Massmart’s competitors, one of which told the FM this week that they made use of the Competition Commission’s processes to ensure Massmart retained a public profile that would allow some insight into what was going on there.
Syd Vianello, an analyst who tracked the deal closely at the time, says an additional significant factor was that some of the large shareholders said they would not sell.
“Over 70% of Massmart’s shareholders were international investors who were excited about the Africa growth story,” Vianello tells the FM. “Everyone believed Walmart was going to use its gigantic purchasing power to reduce prices, grow market share and boost profits. Understandably, the international shareholders wanted to stay for the ride.”
In hindsight, it seems Walmart was extremely lucky there was so much pushback against that initial proposal and decided to pare back the offer from 100% to 51%.
After all, that 51% cost Walmart R17bn, equivalent to $2.4bn at the time. If the US retail giant had been allowed to push through with its initial offer, the 100% would have cost about R32bn, equivalent to $4bn in 2010.
How things have changed. Now, 12 years later, Walmart is able to pick up the balance of the shares at R62 apiece, almost a third of the 2010 offer. But much more significant is that the collapse in the rand since then means Walmart is paying only $377.6m for the outstanding 47%. (A scrip dividend in 2018 accounts for the 2% balance). So, 100% of Massmart will cost Walmart a cumulative $2.8bn, against the originally planned $4bn.
Let’s not forget the dividends Walmart picked up in the intervening years when things were a little better than they have been recently. In addition, Walmart knows the SA and broader African trading environment extremely well and, judging by recent presentations, is upbeat about growth opportunities.
So, in hindsight it does seem Walmart has managed to turn the suboptimal situation it was faced with in 2010 hugely to its benefit.
Vianello says the latest deal makes sense given Massmart’s weak balance sheet and its need for considerable investment. “It wasn’t just a matter of the group’s creditors getting twitchy, Massmart still has to recover from the KwaZulu-Natal riots and flooding and then there’s the huge investment it will need if it wants to roll out a successful e-commerce strategy,” Vianello tells the FM, adding that being off the market and out of the public eye gives additional flexibility to take the actions needed.
The competition authorities, which have a habit of dragging out transactions, finally gave Walmart the all-clear to take control of Massmart in March 2012
The good news for shareholders who have bought in the past nine months, and are looking forward to banking a profit, is that this time around there’s little prospect of regulators gumming up the works.
As it stands, it’s only the Takeover Regulation Panel that has to sign off on the deal. Given that the offer price is above where the share has traded for much of 2022, there might not be much shareholder opposition.
As for the competition authorities, which have a habit of dragging out transactions, they finally gave Walmart the all-clear to take control of Massmart in March 2012. Competition analysts can see no justification for a second bite.
One competition lawyer, who worked on the 2010 deal, described it as a landmark case that created a blueprint for subsequent acquisitions by multinationals. “The merger conditions relating to labour and suppliers set down by the competition authorities were used to frame other merger conditions such as those in the AB InBev and Coca-Cola deals,” the lawyer tells the FM.
Less sympathetically, the deal is described as then economic development minister Ebrahim Patel’s first “big play at extracting regulatory surplus out of firms forced to notify merger transactions”.
Initially it looked to be an easy case. In early 2011, after seeking a number of deadline extensions, the Competition Commission approved the merger without conditions. It believed the merger would not lead to a substantial prevention or lessening of competition; that it would not result in any changes to employment; and that any negative impact on small business was addressed by Walmart committing to sourcing products locally.
In May 2011 the Competition Tribunal approved the deal but acknowledged that it did raise public interest concerns relating to employment and the displacement of small businesses.
These concerns, the tribunal believed, were addressed by the merging parties, which committed themselves to establishing a R100m programme to develop and train local suppliers in how to do business with the merged entity and Walmart. The commitments were made conditions of the tribunal’s approval.
Patel was not happy: he had hoped the competition authorities (part of his department) would drag out the process for considerably longer, giving him precious time to extract concessions from the merging parties. He and two other government departments — trade & industry and agriculture & fisheries — appealed against the tribunal decision, claiming they had not got a fair hearing before it was made.
In March 2012 the Competition Appeal Court dismissed the appeal but judge Dennis Davis acknowledged some legitimate concerns about the impact on small producers and insisted on the establishment of a R200m Supplier Development Fund (SDF). This was a compromise between the initial R100m offered by Walmart and the R500m sought by Patel.
By most accounts the SDF is regarded as a success. A subsequent report by the commission concluded that the fund “addressed both competition and industrial policy concerns; specifically, attention to vulnerable sectors, encouraging entry and expansion of SMMEs into the Massmart supply chain as well as adhering to local procurement commitments”.
Massmart does seem to have made the most of a situation it could do nothing to avoid. Brian Leroni, senior vice-president of group corporate affairs, tells the FM the SDF continues to operate within Massmart and is “widely regarded”. “We have learnt so much, after making our fair share of mistakes, about how to leverage this type of intervention for procurement advantage.”
Leroni provides an upbeat perspective on an initiative that was slammed by many investors, noting that a “sensible balance” between practices that do not deter investment and those that ensure a responsible response to public interest issues is needed.
“This balance was mostly achieved in the circumstances of the initial merger. We have experienced both DTIC [the department of trade, industry & competition] and the Competition Commission to be pragmatic and constructive partners,” he says.
Employment levels also benefited due to the group’s growth.
It does look like a win-win all round. Much now rests on whether Walmart can run 100% of the company better than it did the 51%. The past 11 years have demonstrated little of the huge benefits initially expected.
Instead, the investment community has been reminded of just how patchy Walmart’s track record remains outside Hometown, USA.
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