Walmart Inc. ’s WMT -0.46% tidy-up of its overseas empire will hit a rough patch this month if trustbusters block the sale of its U.K. unit to a competitor. Fortunately, though, the division could still attract a private-equity buyer.
Chief Executive Doug McMillan is rethinking the U.S. retailer’s sprawling international operations, which span 27 countries. Rather than opening its own stores overseas, Walmart wants to become a controlling shareholder in strong domestic players. The company’s $16 billion investment in Indian e-commerce company Flipkart last May is a good example of the fresh approach.
Walmart also has to become shrewder about where it allocates capital as it goes head-to-head with Amazon. That means getting out of countries that aren’t performing or that generate low returns. Walmart offloaded an 80% stake in its weak Brazilian business last year.
Next up is the U.K., one of the toughest grocery markets in the world. Walmart said last April that it would merge its chain of Asda supermarkets, which it has owned for two decades, with Britain’s second-largest grocer, Sainsbury’s. In exchange, it will get a 42% stake in the combined business. It will have the right to sell out after four years.
Britain’s grocery sector is already controlled by a handful of big players so a ruling by competition authorities due this month could go either way. Sainsbury’s shares are pricing in just a 50% chance that the deal goes through, according to Jefferies analysts.
If things unravel, a financial buyer could step in. Supermarkets generate a lot of cash, making them good candidates for leveraged buyouts. Walmart’s Brazilian unit sold to private-equity firm Advent International, and Apollo splashed $1.4 billion on U.S. food retailer Fresh Market in 2016.
Asda is one of the top cash generators of all Walmart’s overseas businesses. After a period of decline, it has now generated six consecutive quarters of like-for-like sales growth, suggesting heavy investment in the stores may not be necessary. Freehold property is a lure, too: The grocer owns three-quarters of its stores in the U.K. A private-equity owner could sell and lease them back.
Granted, the price tag would be high: Sainsbury’s initial offer valued Asda at £7.3 billion ($9.5 billion). A joint bid, such as the one that KKR , Blackstone and CVC considered for Sainsbury’s in 2007, would make a deal more digestible.
Britain’s imminent exit from the European Union could delay a sale. Until a new trade agreement is in place, no one really knows what will happen to the profits of U.K. supermarkets who stock their shelves with many products imported from Europe.
Getting the green light for its tie-up with Sainsbury’s is the ideal outcome—Walmart would benefit from the cost savings the deal would generate. But at least there is another exit if it is needed.
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