Wal-Mart Stores Inc's plan to buy its way into the South African market with a $4 billion acquisition is a pricey move that highlights how much the retailer is betting on growth outside the sluggish US markets.
While it could take some time for an acquisition of South Africa's Massmart Holdings Ltd to pay off, analysts said the move is one the world's largest retailer - with a market capitalisation approaching $200 billion and more than $10 billion in cash on the books at the end of July - could afford to make.
"They could pay for this and they could probably pay more than what it's worth to get the infrastructure and get the intelligence in the area," Wall Street Strategies analyst Brian Sozzi said.
Wal-Mart said that it was in talks to buy Massmart, South Africa's third-largest listed retailer, and has made a nonbinding proposal worth about 30 billion rand ($4.1 billion).
The bid is about 13 times Massmart's earnings before interest, taxes, depreciation and amortization, Janney Montgomery Scott analyst David Strasser said.
"We get their desire to use this as a springboard to grow, particularly in sub-Saharan Africa," Strasser said. But he added that such a price-tag for a deal in "very difficult and challenging markets" means returns would "lag for years."
He also noted that for the deal to drive returns, Wal-Mart would need to use Massmart to move into other countries in the region - some of which have economic and political risks. "For every relatively stable country like Botswana, there is a Zimbabwe," he said.
South Africa itself, a country with about 25 percent unemployment, might be a risky place for Wal-Mart to look to expand. But Wal-Mart has made it clear that international growth is a top priority, especially in the wake of more than a year of declining US same-store sales at its namesake stores.
Wal-Mart's international sales rose about 11 percent last year, eclipsing $100 billion for the first time. International accounts for about a quarter of the company's overall sales.
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