Wal-Mart Has Several Acquisition Options

Holding $7.33 billion in cash at the end of fiscal 2013, Wal-Mart has lots of options on how to expand its global reach through acquisitions in Turkey, Colombia and other nations.

And while officials with Bentonville-based Wal-Mart Stores have said those two emerging markets are in its radar, analysts with Kantar Retail say any acquisition – domestic or abroad – would need to fit into Wal-Mart’s overall strategy of growth, leverage and returns.

Wal-Mart lost out on one Colombian deal that would have given it a head start in this emerging market. In November, Carrefour sold its Colombian retail assets (70 stores) to Chilean Cencosud. Wal-Mart had reportedly been in talks with Carrefour for nearly a year before negotiations stalled early last fall.

In mid-December, several media outlets reported Wal-Mart was pursuing an 80% stake in Turkish retailer Migros Ticaret from London-based private equity group BC Partners. The deal was valued at roughly $4 billion, which included debt.

Wal-Mart did not comment on the meetings, and there has been no formal offer.

Insiders also say Wal-Mart will focus more on its African acquisition of Massmart (51% majority interest) in South Africa, which closed in November. The $2.4 billion deal gave Wal-Mart an instant foothold into perhaps the last frontier of modern retail opportunity. Massmart operates 340 stores across 12 Sub-Saharan countries.

Wal-Mart has pledged to add 40 more Massmart stores this year on the heels of a 15% increase in annual profits. That said, analysts note the back-half of 2012 was a bit sluggish as the retailer has logistical and infrastructure issues to overcome.

Wal-Mart ASDA – the retailer’s operation in the United Kingdom – has set its sights on acquiring the failed British music chain HMV. This would be ASDA’s entrance into the smaller format convenience store model. ASDA’s interest involves preserving the brand and operating the 100 stores.

Wal-Mart’s biggest return on capital comes from its U.S. stores, so it’s hard to ignore the retailer’s potential interest in domestic acquisitions.

Wal-Mart acquired six domestic tech companies between 2010 and early 2012 that now make up @WalmartLabs. This division has facilitated everything from an intuitive search engine for Wal-Mart.com, to Scan & Go mobile technology to enhance shopper experiences.

Kantar analyst Leon Nicholas said Wal-Mart could just as easily seek out a Rite Aid or Family Dollar to give it an instant saturation of the smaller footprint model – an operational model Wal-Mart is working to develop.

While this is speculation only, Rite Aid has a market capitalization of $1.59 billion, and more than 4,500 stores. This footprint includes urban areas such as New York City, in addition to states that have been resistant to Wal-Mart, such as Vermont.

This proposition also plays into Wal-Mart’s health care initiatives, as many Rite Aid stores offer a wide variety of services through in-store clinics.

Family Dollar would be a more expensive acquisition with a market capitalization of $6.93 billion. But this scenario is interesting given the discounter has 7,600 small stores through the U.S.

Wal-Mart has 4,000 stores in the U.S., mostly supercenters that often compete head-to-head with Family Dollar for the cost-conscious consumer – also seen as Wal-Mart’s core shopper.

Where Wal-Mart decides to invest for the future, whether it’s by acquisition of another retailer or purchasing a shared service provider, Nicholas said the main focus will be on how efficiently that capital allocation can drive higher profits.

This is key as he doesn’t expect to see U.S. comp store sales grow above a 2% rate in the next few years.