ASDA battles back with $1.13 billion acquisition of Netto(70131)

Wal-Mart s Asda to Buy U.K. s Netto for $1.13 Billion

Wal-Mart Stores Inc. s Asda Group Ltd. agreed to buy Netto s 193 U.K. discount supermarkets for 778 million pounds ($1.13 billion) as it fights to retain its No. 2 position in Britain s food retailing market.

The acquisition from A.P. Moeller-Maersk A/S s Dansk Supermarked unit comes a week after Leeds, England-based Asda reported its first decline in same-store sales in four years. The Wal-Mart unit said today it aims to convert the Netto stores to its smaller-format supermarkets by the middle of 2011.

The purchase is Wal-Mart s largest since the retailer took control of Chilean grocer Distribucion y Servicio D&S SA for $1.88 billion last year. Asda is seeking to counter a decline in U.K. market share, which fell to 16.8 percent in the 12 weeks ended May 16, according to Kantar Worldpanel, leaving it only 0.5 percentage points ahead of third-placed J Sainsbury Plc.

Having underperformed through much of the second half, they re taking a more aggressive stance, Caroline Gulliver, an analyst at Execution Ltd., said by phone. They are really tackling the smaller supermarket route with this acquisition.

The takeover may have a negative impact on larger competitor Tesco Plc and William Morrison Supermarkets Plc, the smallest of the U.K. s four main food retailers, Gulliver said. Netto has a 0.7 percent share of the market.

Valuation

The acquisition elevates us to the level we want to be at very quickly in smaller stores, Asda Chairman Andy Bond said in an interview.

Asda plans to add the Netto outlets, typically of around 8,000 square feet (743 square meters), to a new division for stores of less than 25,000 square feet. The number of product lines available in the outlets will be increased to 10,000 from 1,800 to encourage customers to do more shopping, Asda said.

The Wal-Mart unit is paying twice the average valuation for U.K. food stores, Colin McGranahan, an analyst at Sanford C. Bernstein & Co. in New York, said today in a note to clients.

The price of 1.1 times sales for Netto highlights the competition for small format stores in the U.K. and shows Wal- Mart s willingness to pay up for real estate and access in what is a challenging real-estate market, McGranahan said.

Wal-Mart gained 68 cents to $50.70 at 4:01 p.m. in New York Stock Exchange composite trading.

Netto s earnings really aren t relevant because we are going to convert them into Asda stores, Bond said. The retailer will add better quality products and more extensive range of services, driving higher revenue than Netto, he said.

Until regulatory approval is granted, all the stores will continue to operate as Netto, Asda said. Asda was advised on the transaction by Lazard Ltd.

More Acquisitions

Our intention to grow smaller stores will continue organically as well as through acquisitions, Bond said. Asda outlined plans to become the U.K. s biggest non-food retailer and No. 2 in food earlier this year.

Bond was succeeded as Asda CEO this month by the chain s Chief Operating Officer Andy Clarke.

The Netto acquisition may increase the possibility of Asda making an acquisition in the non-food area, according to Clive Black, an analyst at Shore Capital. Home Retail Group Plc Chief Executive Officer Terry Duddy damped speculation of a takeover by Asda last month after a newspaper report.

It s not unreasonable to draw a line across from this and suggest a general retail acquisition potential grows after this purchase and Home Retail is a likely candidate, Black said.

Wal-Mart, the world s largest retailer, this month reported a 10 percent jump in first-quarter profit helped by growth in its international operations.

Very Good Price

Maersk, Denmark s biggest company, had its first annual loss in at least five decades last year as its container shipping line slumped amid overcapacity and lower trade volume.

Maersk advanced 2,100 kroner, or 4.8 percent, to 46,000 kroner in Copenhagen trading today.

Dansk Supermarked will keep its more than 1,000 Netto stores in Germany, Poland, Sweden and Denmark. The retailer, which currently employs 43,000 people, had sales of more than $18 billion last year, according to its website.

Dansk Supermarked got a very good price for the stores, no matter by what measure we look at it, CEO Erling Jensen said by phone. It was an offer we couldn t refuse.

The company plans to record an accounting gain of 4.6 billion kroner ($760 million). The total consideration and the gain may be reduced depending on regulatory remedies required for approval, Dansk Supermarked said.

The price looks very attractive, Jacob Pedersen, analyst with Aabenraa, Denmark-based Sydbank A/S said in a note to investors. The price suggests a higher value of Maersk s retail activities than we have in our models.

Maersk owns a 68 percent stake in Dansk Supermarked, while closely held F. Salling Gruppen owns the rest.

ASDA battles back with $1.13 billion acquisition of Netto

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