After a slight pause, Wal-Mart (NYSE: WMT) has been given the go-ahead to complete its $2.4 billion merger with African retailer Massmart. This could be big, big news for a company that's busy expanding its business abroad. Wal-Mart has already announced plans to invest close to $755 million in the mighty emerging market of Brazil this year, adding to the $3.8 billion it's already spent there.
Why the international focus? Because even though Wal-Mart posted increasing revenues and profits in its first quarter, the world's largest retailer couldn't avoid the striking reality that its business was being driven mostly by gains in international operations, not from operations at home. Wal-Mart made about 26% of its sales, or $112.1 billion, from its international operations in the past four quarters. Meanwhile, the Bentonville behemoth saw its U.S. comparable-store sales slide for an eighth consecutive quarter.
African safari
After having penetrated lots of international markets already, the Massmart deal will give Wal-Mart access to a whole new continent and a billion potential customers. It's an attractive opportunity. As a testament to the continent's short- and long-term attractions, in the latest global five-year GDP growth forecast, seven African countries featured in the top 10.
In addition to giving the company a foothold in relatively prosperous South Africa, the deal will also help the 'Mart gain penetration into the rest of rapidly developing sub-Saharan Africa. Massmart has 288 stores, most of which are in South Africa, with the balance spread out across 13 other sub-Saharan countries. These stores generated $7.5 billion in revenues and $182 million in earnings in 2010.
With the deal, Wal-Mart acquires a 51% stake in Massmart but must promise to not to cut jobs for two years, to respect union bargaining agreements for three years, and to invest in local supply chains to help promote local businesses.
Struggle in America
The deal comes at a good time for Wal-Mart. Although international operations have shown positive signs of growth, operations back home have slowed -- though not from a lack of effort.
Regular Wal-Mart customers have jumped ship, with price-conscious customers preferring to visit deep-discount stores such as Family Dollar (NYSE: FDO) and Big Lots (NYSE: BIG). Other consumers have chosen more upscale discount stores, such as Costco (Nasdaq: COST) and Target (NYSE: TGT). To help regain its lost foot traffic, Wal-Mart has decided to return to its "Every Day Low Price" campaign. But that has seemingly not been enough, at least not yet.
The Foolish bottom line
The Massmart deal will help bring a larger platter of products to South African consumers and also provide them with lower prices. With store expansions on the horizon and the opportunity to spread its business to some sub-Saharan countries, Wal-Mart could really win with this deal.
