Thursday 24 November 2016

Walmart needs to cut Asda loose

An interesting article published earlier this year by Bloomberg sets out why Asda should be sold off:

Aldi & Lidl have eliminated Asda’s low price advantage, resulting in falling like-for-likes, with Asda’s sales growth trailing the other mults… (graphs in the original article really spell it out).

NamNews readers will be aware that Asda has been underperforming and thus diluting Walmart’s performance in terms of ROCE and Net Margin since its acquisition in 1999.

Normally, Walmart would have solved these problems by a combination of organic growth and acquisition of say Sainsbury’s or Morrisons, but UK planning legislation limits the building of new stores and competition legislation prevents acquisition of sizable competition.

This leaves sell-off as the only option for their UK operation.

Bloomberg estimates that Asda would be worth £8bn based on current market valuations of the other mults (i.e. @ 40% of sales).

The UK, in current competitive circumstances (Discounters, large space redundancy, seismic-shifts, ‘Brexit’ currency impact…, you name it!) would be unattractive for global players, given the probable purchase price and the need to justify the move to their respective stock markets.

This leaves private equity.

In which case, we enter a whole new ball-park, where the emphasis would shift to optimising the asset-base (stores) and financial performance (ROCE), in a 5 year time-frame leading to flotation….

This would provide a new basis for NAMs in their dealings with Asda:
  • Emphasis on quantifying cost & value in all aspects of the supplier-Asda trading relationship (Margin, Credit, rotation, trade investment, NAM-advice, and deductions)
  • Relating trade investment directly to Asda P&L
…and all within a 5 year window….

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