Massmart share price reacts to Walmart buyout ignoring interim results

Walmart Inc. wants to buy Massmart at a share price of R62

Major US retailer, Walmart Inc. has proposed in principle to buy out the remaining shares of JSE listed retailer Massmart. Walmart is already a majority shareholder of Massmart having bought a 51% stake in the company around 12 years ago.

The suggested offer is at R62 in cash for each Ordinary Share held by eligible Massmart Shareholders. The price tag is a 62.4% premium to the 90-day volume weighted average price as of the 26 August 2022.

Should the deal go ahead it would result in Massmart being delisted from the Johannesburg Stock Exchange (JSE).

Massmart interim results

Massmart has also just released its interim results which saw the groups headline loss increasing substantially from the prior years comparative period.

Salient features from the results (for continuing operations) are as follows:

• Sales increase by 1.9%
• Gross profit margin decreased by 19.6%
• Trading profit before interest & tax decreased by 52.4%, the figure also excludes retrenchment, business transformation and impairment costs
• Headline loss increased by 152%

Comments on proposed acquisition and results

The group results were unfortunately dismal, with turnaround efforts unable find real traction amidst a plethora of disruptions. These disruptions extend further back than just the current reporting period and include the pandemic, civil unrest, flooding (KZN) and soft consumer demand. The deal would certainly help with the financial liquidity / stability of Massmart.

However, the results don’t appear to matter right now with the share price having rallied more than 40% on the news of the potential acquisition. Successful completion of the deal would of course also see the company delisted, ending its public investment ‘opportunity’.

Will a deal be realized?

The deal is said to already have support from around 25% of outstanding shares. The significant premium to recent (preproposal) pricing of the company’s shares, suggests an unlikely refusal.

While still subject to regulatory scrutiny from The Takeover Regulation Panel, JSE and South African Reserve Bank (SARB), independent auditor Price Waterhouse Cooper (PWC) has issued a report to suggest that conditions thereto are ‘fair and reasonable’.

What to expect from the Massmart share price?

We feel that the Massmart share price could idle around current levels with the acquisition price of R62 a ceiling for the time being. The length of time thereto remains relative to that of the shareholder and regulatory authority approval, with the latter duration being indeterminate at this stage.

While the R62 acquisition ‘ceiling’ perhaps limits the upside, the downside potential for the share price becomes significant in the event of the deal failing, although this seems a less probable outcome.