Wal-Mart have made a bid for Massmart, our favoured retail stock

It finally HAPPENED! Wal-Mart have made a bid for Massmart, our favoured retail stock. In the post results interview with CNBC Africa the chief of Massmart Grant Pattison suggested that the premium of a Wal-Mart type bid had been around for the better part of 18 months. Yip. True. And the stock has looked expensive for that long, but hey, don't fight with the market. Here goes the relatively thin on detail SENS announcement:




"Shareholders are advised that the Company has received a non-binding proposal from Wal-Mart Stores, Inc, ('Walmart') which could lead to Walmart making a cash offer to acquire the entire issued share capital of the Company for a price of ZAR148 per share ('the Proposed Offer'). In the event that a firm offer is received the board of directors of Massmart will obtain an independent opinion and express a view on the firm offer to shareholders."



A due diligence will take place and there will be a period of exclusivity. From both parties, suggesting that Wal-Mart were and are looking at other businesses in South Africa, that part is interesting. By my count there are 201.5 million shares in issue. Multiply that by 148 Rands a share and you get to 29.825 billion Rands. So South African shareholders are thrilled. And I say that lightly, because there are many more international shareholders than locals, because, you know, the stock looks expensive to most here. It does not trade at the long term averages, they say. Oh yes, the long term averages back when the 90 percent of the population was denied credit, those long term averages.



Check this bit out from a message that we sent recently to clients after the analysis on Massmart, this part about shareholders and a bid specifically. Here goes, some excerpts from our message on the 10th of September 2010: Is Massmart overvalued at R129 per share?

One reason often mentioned to justify the elevated share price is the idea that Wal-Mart, the world's largest retailer, is looking to enter the African market, and may do so by acquiring a local company. The two most likely candidates are Shoprite (bigger African footprint) and Massmart (similar business model). Wal-Mart have confirmed their interest in global expansion, and senior executives from Bentonville Arkansas have toured South Africa extensively, but nothing has been announced. In fact, Massmart management have confirmed that there is no deal on the table. Or under the table. Or even under consideration.



Another possible explanation for the high share price relative to earnings is the fact that Massmart has a very high percentage of foreign shareholders, who consider it to be correctly priced compared to similar companies in places like Mexico and Turkey. Take a look at this chart:





Pie chart of shareholders











CNBC's Stephen Gunnion interviewed the Chief Executive of Massmart, Grant Pattison, last week (back then) on these and other issues. Click here to take a look at the YouTube clip, courtesy of ABN Digital.





In fact, we are not that uncomfortable with the current market valuation, and expect Massmart's earnings to grow into the share price in the year ahead. Here at Vestact we depart from the point that share prices are "right", insofar as they reflect the aggregate view of the current value of the future earnings flows that will accrue to a company's shareholders.

So far this morning, as at ten fifteen this morning the stock is up around 10 and a half percent at 149 Rands a share, and the stock has traded a whopping 192 million Rands, a whole lot more than the average 65 million a day. Who are the thrilled local shareholders? The PIC with over 18 million shares (old established holding), Stanlib with around 14 and a half million shares at the beginning of the year, I hope they still have them. But this one when I first received the shareholder register made my jaw drop.




As per a SENS announcement 31 August, when the chief Grant Pattison exercised a few options, check this out: "After the abovementioned sale, Mr Pattison still holds 1,921,389 Massmart shares or options." Wow, that is shy of one percent of the company. He is by my count, the tenth biggest shareholder overall. Wow, I guess he will be voting in favour, or would he vote in this case? Probably not. I don't know the answer to that. Did your jaw drop too?



In a videocast on the Moneyweb website, Grant Pattison said that the first bid actually happened on Friday, the board of Massmart met over the weekend. Like he said, first things first, the due diligence needs to take place first.



From the buyers point of view, 4.2 billion dollars is NOT a lot of money for Wal-Mart. Wal-Mart has a market cap of 196.66 billion Dollars. They trade on less than 14 times earnings at the 54 dollars a share level. Quarterly revenue of 100 billion dollars for Wal-Mart. Let me put it this way, Wal-Mart paid 2.3 billion Dollars worth of dividends in the first half of this year, and are going to replicate that in the second half. Their dividend flow alone for this year is more than the whole deal is worth. Size and scale of Wal-Mart, who employ around one percent of the American population.



And the most exciting thing that could come out of this, we could add to People of Wal-Mart. We must have some legends that hang out at Woodmead Makro. Sis, that is just plain ugly.