Retail giant Wal-Mart Stores, Inc. (WMT) has finally won the approval from a South African court for its proposed acquisition of Massmart Holdings Ltd., the third largest retailer of South Africa.
The deal was first announced in September 2010, when Wal-Mart had offered to acquire a 51% stake of the South Africa based consumer goods distributor, Massmart. Wal-Mart offered to pay 16.5 billion rand or 148 rand per Massmart share as it aimed to capture the high growth developing markets of South Africa.
After much consideration by the Competition Commission and over some issues of job losses and local procurement raised by the South African labor unions, Wal-Mart finalized the deal in June 2011 and agreed to proceed with the deal on the conditions that there would be no job cuts for a period of at least two years and the company will create a 100 million-rand fund to assist local suppliers and manufacturers.
Further, Wal-Mart also announced the creation of 15,000 jobs in South Africa within the next five years. Walmart also stated that it would open new stores over that period and expand its procurement of food and consumer goods from local suppliers by an additional 60 billion rand after its tie-up with Massmart.
However, the South African government later decided to review its decision to allow Wal-Mart to purchase a controlling stake in Massmart, as it failed to gather sufficient information from the retailers related to product sourcing and other public interest issues. Additionally, the government objected that Wal-Mart will not be able to protect the economy and prevent a surge in imports from undermining manufacturing output.
The Competition Appeal Court has now finally green signaled Wal-Mart to go ahead with its 16.5 billion rand purchase of a controlling share of a South African chain. In addition, the court turned down the government’s request to have the deal re-examined, but stipulated that Wal-Mart must reinstate 503 South African workers, which Massmart laid off as it tried to get Wal-Mart to agree to a deal.
The court’s decision was long-awaited and it will now allow Wal-Mart and Massmart to move ahead with plans and work together to offer a wide range of goods at affordable prices that will benefit South African consumers. Besides, they plan to double food sales in Africa in the next five years, thereby challenge South Africa’s dominant grocers such as Shoprite, Pick n Pay and Spar.
Wal-Mart, which competes with Target Corp. (TGT), holds a Zacks #3 Rank implying a short-term Hold rating.
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