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‘Freedom’ and ‘flexibility’ explain Wal-Mart’s Seiyu buyout


BENTONVILLE, ARK. —Of all the unique challenges Wal-Mart faces as a function of its size, there is one problem other retailers wish they had: what to do with all the cash produced by Wal-Mart’s worldwide network of 7,000 stores that this year will generate estimated sales of $375 billion.

It’s a nice problem to have and one Wal-Mart will increasingly be faced with as it scales back domestic new store construction while it expects cash flow from operations to continue growing. In years past, Wal-Mart would have plowed most of that money into building new stores, but the company has a new philosophy based on achieving a greater balance between shareholder returns and driving growth. As the spread between capital expenditures and cash flow expands this year and in the future, Wal-Mart will be left with a burgeoning stockpile of money it has indicated will be spent on share repurchases, international acquisitions and dividends.

Most recently, Wal-Mart moved on the international front when it announced plans to spend $862 million to acquire all the outstanding shares of Japanese retailer Seiyu, a company in which it already owns a 50.9% stake. Wal-Mart is convinced it has a bright future in Japan, since the $1.2 trillion retail market is the world’s second largest after the United States, yet the top 20 retailers account for only a 21.4% share of the market. To ensure the deal gets done, Wal-Mart’s offer represented a 60.9% premium over the closing price of Seiyu shares on the Tokyo Stock Exchange on Oct. 19, and a premium of 34.6% over the average closing price for the prior three months.

Wal-Mart made its initial investment in Seiyu in May 2002, and acquired a majority stake at the end of 2005. At that point, Seiyu’s financial results were consolidated into Wal-Mart’s corporate figures, even though Seiyu remained a publicly traded company. Wal-Mart’s acquisition of the remaining Seiyu shares means it will be delisted from the Tokyo Stock Exchange and will become a wholly owned Wal-Mart subsidiary. As such, the disappointing financial results Seiyu has achieved in a challenging market will no longer be subject to public scrutiny. “As a wholly-owned subsidiary, Seiyu will have increased flexibility to invest in merchandising, store renovation, distribution and logistics,” said Wal-Mart vice chairman Mike Duke.

In addition to increased investments in Seiyu and other international markets, the other major use of Wal-Mart’s cash promises to be share repurchases. Wal-Mart cfo Tom Schoewe announced at the retailer’s annual meeting in early June that the board had authorized a $15 billion share repurchase program to replace a $10 billion program approved in September 2004 that had only $3.3 billion in authorization remaining. The big upgrade makes sense for Wal-Mart since its shares have been dead money for the past seven years and even at the current valuation have failed to attract enough buyers to cause shares to appreciate.

However, if investors aren’t interested in owning Wal-Mart, the retailer is happy to repurchase its own stock, which it did in a big way during the past four months when it spent $5 billion buying back stock. The reduction in outstanding shares stands to benefit earnings per share calculations going forward as net income is spread over a declining base of shares.

The other shoe to drop regarding Wal-Mart’s use of cash relates to its dividend. In March of this year, the company increased its annual dividend 31% to 88 cents from 67 cents. At the time, the company said it would spend $3.6 billion on dividends during the current fiscal year. It would be uncharacteristic of Wal-Mart to boost its dividend further this year, which suggests a substantial increase is in the offing for early 2008.

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