Wal-Mart could lead corporate America into Africa(Read article summary)
Wal-Mart's potential acquisition of a South African company is a financial move that most companies have been too scared to make.
Wal-Mart Stores, Inc./AP
Wal-Mart has announced that it is prepared to pay approximately $4.2 billion for Massmart Holdings. Massmart Holdings is a Johannesburg-headquartered chain of discount superstores with a grand total of 290 stores in 13 African countries under brand names such as Makro, Game, and Builders Warehouse. Massmart stores can be found as far away as Ghana and Nigeria and there are stores even in President Mugabe's Zimbabwe.
Massmart would serve as "a fantastic entry point to a broader part of the continent," said Andy Bond, a former CEO of Asda and the man apparently spearheading the purchase. This acquisition, if completed, will be the biggest acquisition undertaken by Wal-Mart in 10 years – and of all places, it’s in Africa. For markets, this could be a game changer, and I venture there are many computer screens in trading floors around the world tracking this transaction very closely.
For quite some time, I have felt that corporate America was missing the Africa story. Like tourists frightened off by rumors of lions prowling the city streets of Nairobi or Lagos, America’s corporate sector has been bamboozled and bogged down in an old African landscape where the only opportunities are to be found in digging up raw materials, and the greatest challenges are with intractable or corrupt government bureaucrats. To be sure, that African landscape still exists, both in mind and in reality.
Sometimes, being the “trusted constable” or the world’s policeman does not allow you to be an entrepreneur.
Last year, India, Inc. completed its second biggest acquisition anywhere, via the purchase by Bharti Airtel of Zain’s mobile phone network. The deal added up to a staggering $10.5 billion. That was quite a statement. China is simply everywhere on the continent, buying up oil reserves and copper mines, and building dams, bridges and roads. But despite all the news of America’s growing military footprint, through the newly established Africa Command, there was not a sniff of America, Inc. It was as if America understood the security and resource games, but that those were the only games in town.
This has changed with Wal-Mart now wanting to put Massmart in its shopping cart. The African continent remains the last frontier of the 21st century. Africa’s resources are vast and still not properly quantified, but the far greater value may be in Africa’s human capital: its consumers.
There are 1 billion souls in Africa, 40 percent of whom live in urban areas, and according to a McKinsey report on Africa’s booming opportunities, Africa already has more middle-class households than India. It’s fitting that a company like Wal-Mart that has always understood the economies of scale is leading the way for America. Africa’s consumer market has scale, and plenty of it.
This will prove a valuable acquisition for Wal-Mart. The company is set to reap an advantage as an early mover. But it won’t be easy. South Africa is a quirky market; its labor force is unionized and combative when compared with the rest of the world. However, when viewed as a “Gateway to Africa,” South Africa is a winner.
With a good deal of its supply coming from China, Wal-Mart will surely be able to take a knife to Massmart’s costs by bringing its scale to bear.
I think this acquisition will be viewed as transformative. And, when the competition sees Wal-Mart’s success, they’ll wish they had been early movers too.
--- Aly-Khan Satchu blogs at Rich Management.