Walmart's U.K. Problems Can't Be Solved With Pricey M&A: Gadfly
Wal-Mart Stores Inc.'s incursion into the U.K. via the 1999 purchase of Asda left it with a giant supermarket that's been losing market share amid intensifying competition. It's hard to see how spending $6 billion on a British upstart retailer chaired by former Tesco Plc boss Terry Leahy might remedy the situation.
The U.S. retail giant has mulled an offer for B&M European Value Retail SA, the Sunday Times reported. B&M is a general discount retailer with over 500 stores, mainly in the U.K., and a growing presence in Germany. An acquisition would fit with a trend of defensive deal-making by the big U.K. grocers, with J Sainsbury Plc buying Argos-owner Home Retail Group and Tesco agreeing to acquire wholesaler Booker Group Plc.
There was no stock market announcement on Monday despite the shares rising 5 percent in early trading. While that suggests nothing is immediately afoot, it would be better for Walmart's investors if it stays that way.
British consumers look set to become more picky as sterling weakness stokes inflation and Brexit uncertainty dampens confidence, so it's easy to see how a discounter like B&M might benefit. U.K. like-for-like sales growth in its first quarter was an impressive 7 percent. And while the shares underperformed badly in the immediate aftermath of the EU referendum, they have bounced back and trade at a decent premium to their sector and the overall market.
Under Walmart ownership, B&M would benefit from greater buying power. There would be savings in logistics and it could offer a new channel for Asda's George apparel brand. But would a deal really be worth it?
Suppose Walmart offered a 30 percent premium to B&M's three-month average share price, equating to a pitch at around 450 pence per share. That would value B&M at 4.9 billion pounds ($6.4 billion) including assumed net debt. If Walmart could boost B&M's forecast operating profits of 300 million pounds in 2020 by an optimistic 100 million pounds, it would make a tolerable mid- to high-single digit percent return on its capital outlay, post-tax.
Move The Needle
The snag is that this isn't going to move the needle for Walmart, worth $230 billion, or for Asda, with its sales of about 23 billion pounds as of 2014. Moreover, it risks distracting the parent from its real task of fixing the presence it already has in the U.K.
Asda needs to invest in customer experience, price cuts and its product range to stand a chance of regaining market share. Either that, or Walmart should find a new parent for the business willing to do the job. Buying B&M would just be a needless diversion.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.