Reviewed Massmart Interim Results for the 26 weeks ended June 26, 2022 and business update
Massmart releases interim results and issues a cautionary announcement regarding a potential offer from Walmart to acquire the outstanding shares in Massmart that it does not already own.
- 4.3% Comparable store sales growth from continuing operations
- 50% Online sales growth
- Expense growth is 3% below inflation
- A potential offer by Walmart to acquire Massmart shares it does not already own for ZAR62 per share
- Potential Offer represents a 53% premium on 26 August 2022 closing share price
- CEO succession also announced
Total sales from continuing operations for the 26 weeks to June 26, 2022, of R38.1 billion represented an increase of 1.9%, with comparable store sales increasing by 4.3%. Gross margin from continuing operations decreased by 95 basis points to 19.6%, while total continuing operations expenses grew to 4.4%, well below inflation of 7.4%. Margin and inflationary pressure resulted in trading profit from continuing operations declining from R792.1 million in the prior-year period to R377.3 million in this reporting period. Pleasingly, cash flow generation for the first half of the financial year improved by R1.4 billion compared to the prior year, while average net debt, excluding lease liabilities, increased by R1.6 billion, driven by the higher opening net balance compared to the prior year. Sales from our online platforms grew by 50.0% compared to the prior-year period, and gross merchandise value (GMV) increased by 108.0% over the same period.
Massmart has issued a detailed cautionary announcement that the Board of Directors of Massmart and the Board of Directors of Walmart Inc. have reached an in principle agreement regarding the terms and conditions associated with a potential offer by Walmart to acquire the outstanding shares in Massmart that it does not already own, excluding Treasury shares.
The potential offer proposes Walmart acquiring all of the outstanding shares of Massmart for a price of ZAR62 per share by way of a scheme of arrangement or a general offer if the scheme of arrangement does not become operational. This represents a premium of 53% to the closing share price and a 62% premium to the 90-day volume-weighted average share price calculated at the close of the market on August 26, 2022. In addition, the potential offer presents an opportunity for minority shareholders to realize immediate value in an environment where there are no near-term catalysts for a Massmart re-rating.
Commenting on behalf of the Massmart Board, Chairman Kuseni Dlamini said, “In line with our fiduciary duty, an independent board was established to evaluate the terms and conditions of the potential offer from Walmart. The Independent Board commissioned a fair and reasonable opinion from an independent expert who has provided a preliminary report indicating that the terms and conditions are fair and reasonable. The Massmart Independent Board, after taking into account the preliminary report of the Independent Expert, is unanimous in its preliminary opinion that the terms and conditions of the potential offer are fair and reasonable.”
The potential offer, if finalized, will provide Massmart with needed access to ongoing financial and operational support from Walmart to sustain the group’s turnaround, which has been impeded by external factors such as COVID-19-related trading restrictions, civil unrest in KwaZulu-Natal, and a challenging economic environment. These factors have exacerbated liquidity risk at Massmart, which Walmart’s financial support has helped to mitigate. This support includes a R4 billion loan provided by Walmart to Massmart at the height of the COVID-19 lockdown in April 2020, 50% of which was subsequently converted, in December 2021, into equity through a perpetual fixed-rate unsecured note.
With an expected inflow of foreign direct investment estimated at ZAR6.4 billion, this potential offer, if finalized, represents a positive vote of confidence in South Africa by the world’s leading retailer. As a credible and high-visibility international enterprise with a 12-year operational history in South Africa, Walmart’s potential offer could stimulate investor interest and confidence in the face of depressed local and international investor sentiment, thereby assisting in the economic recovery of the country.
The final Independent Expert report and the final views of the Massmart Independent Board will be included in a circular to be circulated to Massmart shareholders if a firm offer is made.
In a move unrelated to the potential offer, Massmart has also announced CEO Mitchell Slape’s successor. Slape will step down from his role as Massmart CEO on December December 31, 2022, after taking up the role in 2019. Slape will hand over to Jonathan Molapo,, who becomes CEO, effective January January 1, 2023.
“This is a wonderful moment for Massmart as we recognize top local talent to lead the company in its next phase of development. Jonathan’s appointment has been part of a well-thought-out succession plan that started with his recruitment to the role of Massmart Chief Operating Officer in January 2022, which provided the opportunity for him to establish strong relationships with Walmart and his Massmart colleagues. I would like to thank Mitch on behalf of the Massmart Board for his immense commitment and contribution to Massmart under the most difficult of circumstances. The actions taken by the management team under his guidance have resulted in the successful delivery of more than 30 turnaround projects. Massmart is a better, more focused business thanks to the leadership provided by Mitch,” said Dlamini.
Molapo has strong executive and international leadership experience, having joined Massmart from Astron Energy, where he was Chief Executive Officer from June 2018 to December 2021. Prior to this, he was employed by Puma Energy and Total SA Group, where he held respective roles as Chief Operating Officer and Executive Vice President for Central and East Africa. During his time with these organizations, Molapo was exposed to all aspects of the value chain, gaining experience in the full range of commercial and retail functions, including the ongoing rollout of Total’s retail forecourt stores. He also had the opportunity to work across various geographies, including France and Ghana. Molapo has a BA in Economics from Laurentian University, Canada, and has completed the International Executive Program at the Insead Business School in France.
“Having had the opportunity to get to know Jonathan since he joined the company, we look forward to working alongside him as CEO and building on our commitment to South African customers, associates, and partners. We continue to see opportunity in Massmart and the impact the business can have, providing people across the region with greater access to goods and services they want,” said Judith McKenna, President and CEO of Walmart International.
“On behalf of Walmart and myself, I want to say a big thank you to Mitch for his leadership over the last few years. He has been instrumental in the ongoing transformation of the business and led through the incredibly challenging pandemic environment.”
Slape played a key role in initiating Massmart’s turnaround since his appointment to lead the business in September 2019. Notable achievements under Slape’s leadership include resetting the cost base by removing R1.9 billion in non-payroll costs, leading the disposal of non-core assets, rationalising the Group-wide supply chain, revitalising the Game store proposition and initiating an intensified e-commerce investment programme.
Commenting about the succession Mitch Slape said, “Congratulations to Jonathan on his appointment as the next Massmart CEO. He and I have worked together closely for the past eight months and share views on the way forward. The past three years have been demanding and the time is right to handover to a new leader, to guide the Group through the next phase of its evolution.”
Slape will remain in role until 31 December 2022 and will have ultimate responsibility to deliver the FY2022 financial plan.