Perhaps this was the plan all along? It is difficult to see any other outcome than the announcement by Massmart that it had received an offer from parent Walmart for the shares in the group it didn’t already own.
For a start, in 2019 Walmart company man Mitchell Slape was parachuted in to fix the already ailing retailer.
Slape quickly made the call to get the group out of food retail, shut down unprofitable stores (DionWired), and reorganised the group into two units that would be more recognisable to any executive from its parent’s Bentonville headquarters: retail and wholesale.
Slape has certainly been more eager than predecessor Guy Hayward to lean on Walmart for talent, resources, and global best-practice. After all, it has direct lines to experts at the world’s largest retailer.
Walmart, too, has been supportive. It provided Massmart with a R4 billion loan during the peak of the Covid-19 pandemic to “provide additional headroom”.
That Massmart hasn’t been able to pay this back is another story (we’ll get there).
Last year, it concluded a managed services agreement with Walmart supplier Genpact to outsource its back-office finance and accounting functions. Even its newest fulfilment centre at Riversands near Fourways has a simple Walmart logo on the front of the warehouse and the number ‘9813’. This facility could easily be in Nebraska.
Covid-19 lockdowns as well as looting and unrest in Gauteng and KwaZulu-Natal guaranteed that the group was never going to be in a state for Walmart to get anything close to resembling ‘value’ for its 51% stake in the business.
Plus, there aren’t any obvious buyers. This as the Game turnaround labours on and former star Builders faces a reset of the entire home improvement sector after last year’s boom.
The weak rand means this transaction, pitched at R62 a share, will cost Walmart just $79 million (R1.34 billion). This is practically a rounding error at Walmart’s scale.
The transaction is being spun as “doubling down” and “perfectly” aligned to its “strategy to enter high growth markets”. But it’s been in the sub-Saharan African market for a decade (post the official approval of the 2010 offer)!
That 2010 deal, by contrast, at R148 a share cost Walmart $2.4 billion. These are transactions at very different scales.
On the whole, the financial results for Massmart for the six months to 26 June are not fantastic.
Underlying trading wasn’t entirely terrible, but trading profit halved to R377 million. While volumes helped grow trading profits by R187 million, it took margin hits across the business which resulted in a R312 million profit impact. In short, it sold more things but less profitably than previously.
Group sales were up 4%, if you exclude the soon-to-be-disposed Cambridge Foods business. Its headline loss more than doubled to R903 million.
Game’s core stores (excluding the 15 in South Africa and 14 in East and West Africa which it wants to dispose of) posted flat sales versus the first six months of 2020 (R6.4 billion).
Margins in Game are looking better (74 bps increase) and the trading loss narrowed to R231 million (from R330 million). Comparable sales in these stores was up 2.5%, with growth in five of the first six months.
But the group cautions that on Game, there is “more work to do”.
Builders saw a 2.1% decrease in comparable sales (R7 billion), with trading profit halving to around R292 million. Following the “surge in DIY spend” in previous years, customer spend is normalising.
Margins dropped by 170bps to 33.7% as it “invested in price” in a “highly competitive environment”.
Wholesale (Makro, Jumbo and Shield) saw a 5% increase in sales to R23.8 billion (8.1% on a comparable basis). Even here, it took a margin knock.
It says soft general merchandise sales (also the culprit at Game) impacted both mix and margin.
Massmart’s balance sheet is rickety – at best – and taking this company off the market will at least allow Walmart to fix it without gifting minority shareholders a free ride.
Average net debt is at R9.4 billion. It “restructured” half of the R4 billion loan from Walmart in December (R2 billion is now a perpetual bond) likely as there is no indication it will be able to repay this in the near term. The remaining loan’s term was extended to six months in December and renewed earlier this month.
Massmart cannot declare any dividends until all deferred interest on the perpetual bond is paid (not that it can afford to pay any dividends given its loss-making situation).
Interest costs on its loans increased by 26% on last year (to R279 million), because of the higher net debt amount as well as rising interest rates.
Trade payables (creditors) are possibly at the limit (R15.6 billion) in this current structure, i.e. where Walmart isn’t standing completely behind debts.
Negative free cash flow
The equity number – at a threadbare R1.4 billion – doesn’t tell the full story. Exclude the R2 billion perpetual bond (accounted for as equity) and equity is negative to the tune of nearly R700 million.
Massmart reported negative free cash flow of R3.9 billion for the six months – bad … but an R809 million improvement on 2021.
One of the reasons volunteered for the ‘potential offer’ is that “the divestiture of non-core assets, although crucial to the long-term strategy of Massmart, will have an impact on the profit and loss of Massmart in the short term”.
In other words, things may get worse before they improve.
At present, Massmart’s revenue (R38 billion for the half-year) is just 1.6% of Walmart’s global turnover. The weaker rand probably forced Walmart’s hand – buying out minorities at these levels is a no-brainer. Or, as it terms it “Walmart is of the view that now is the appropriate time to transition Massmart out of the publicly listed environment”.
A leadership transition from Slape to COO Jonathan Molapo from January is a politically shrewd move and will surely make the competition and regulatory process less challenging than it might’ve been.
Slape may have also had enough and perhaps doesn’t exactly have the appetite to ‘sell’ a transaction to government over the next year?
The Public Investment Corporation’s stake (of under 4%) isn’t a stumbling block. Walmart and Massmart have a track record in delivering on the conditions imposed by authorities for the first transaction.
This will assuage competition regulators and the Department of Trade, Industry and Competition. And besides, Massmart isn’t exactly the roaring giant taking on all comers that it was in 2010.
Listen to Slape chatting to Ryk van Niekerk about Massmart’s buyout offer and its latest results (or read the transcript):