Wal-Mart seals Trust-Mart takeover

Wal-Mart places a value of $1 billion on Trust-Mart's network of 101 hypermarkets as it aims to cement its China presence.
Wal-Mart has confirmed its purchase of a 35% stake in Bounteous which operates Trust-Mart, a chain of 101 hypermarkets in China.

Wal-Mart did not disclose how much it paid for the stake or any other financial terms of the deal saying only, ôif certain conditions are met, Wal-Mart will acquire ownership control in the futureö. Subsequently, a Wal-Mart spokesperson told media that Wal-Mart intended to take full control of Trust-Mart in around 2010.

There is speculation that Wal-Mart has valued Trust-Mart at around $1 billion and that it will pay the agreed consideration in instalments. Wal-Mart has not confirmed the rumours and did not yesterday announce deal parameters citing confidentiality.

It is believed that the instalment payments are structured to correspond with a phased acquisition programme, whereby Wal-Mart will first acquire 30 stores that adhere to Wal-Mart standards, for example on safety regulations. Trust-Mart is to re-organise ownership of the remaining 70-odd stores (many are franchises) and make them comply with Wal-Mart operating standards in time for Wal-Mart to effect a full acquisition by 2010.

Trust-Mart has operated in China since 1996 and today has 101 stores in 34 cities across 16 provinces and municipalities. It is particularly strong in Guangzhou, Chengdu, Xiamen and Shanghai. Its stores have a range of food and non-food items including electronics, apparel and books.

The acquisition significantly bolsters Wal-MartÆs competitive position in China. It gains significant lead time over its rivals as permissions necessary to develop hypermarkets in ChinaÆs increasingly crowded cities are no longer easily forthcoming. Even if permissions are granted, the process of creating the geographically well-dispersed network Trust-Mart has is time-consuming.

Others in the race for Trust-Mart at various stages included Carrefour and Tesco.

Wal-Mart entered China in 1996 and currently operates 73 outlets in 36 cities including Supercenters, SAM'S CLUBS and neighbourhood markets. Planet Retail had, in November, estimated Wal-MartÆs share of the China market - including Trust-Mart - at 0.7%, taking it ahead of Carrefour at 0.6% and others including Auchan, Watson, Tesco and Metro.

In October 2006, Wal-Mart announced it had appointed Ed Chan as head of its China business succeeding Joe Hatfield. Hatfield, a 32-year Wal-Mart veteran, opened Wal-MartÆs first China Supercenter in 1996 and led the companyÆs China business for 12 years. In contrast, Chan was hired laterally, from the Dairy Farm Group where he ran 1,400 stores. Chan was due to start leading Wal-MartÆs China business this month. Observers commented that Chan was hired to take Wal-MartÆs operations in China to the next level. It was also speculated that hiring someone familiar with the local terrain was necessary for Wal-Mart to tailor its offering to Chinese consumers.

ChanÆs hire came at the end of a year of ups and downs for Wal-Mart in Asia. The company initiated discussions with Trust-Mart to expand its footprint in China but sold its South Korea operations. In May 2006, Wal-Mart announced the sale of its 100% subsidiary in South Korea to Shinsegae. At the time Wal-Mart had said it was finding it difficult to reach the scale it wanted in the country where it had been operating since 1998 and had amassed 16 stores. Analysts commented that Wal-Mart was having a hard time earning a profit in the country, as demanding South Korean customers did not take to the Wal-Mart format or offerings.

As well as focusing on China, Wal-Mart is also developing its strategy for India. Wal-Mart is currently in discussions with Sunil Mittal, promoter of Bharti Tele-Ventures, to set up shop in India. The Indian government is announcing its next year's budget today (February 28) and it is widely anticipated that the budget will include a relaxation of guidelines for foreign direct investment in the country's retail sector. An announcement from Bharti and Wal-Mart is expected to follow shortly thereafter.

Growth in Asia is critical for Wal-Mart which has already reached high penetration levels in its home market in America and is battling later entrants like Target for market share. With the Trust-Mart acquisition completed, Wal-Mart has created a strong foundation for its China plans and ensured one plank of its Asia growth is significantly strengthened.

Wal-Mart was advised by Credit Suisse and Bounteous (Trust-Mart) by UBS on the deal.
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