Wal-Mart has agreed to buy
35 per cent of the company that operates the Trust-Mart chain of hypermarkets in China and could eventually pay about $1bn for control of the operation.
The deal is the latest heavy investment by an international retailer in the country’s fast-growing consumer market. If Wal-Mart takes full control of Bounteous, the company that operates Trust-Mart, it would become the biggest hypermarket chain in China.
Trust-Mart, founded in 1996 by a Taiwanese entrepreneur, has 101 hypermarkets in 34 cities, making it one of the largest, although analysts said that it has struggled in recent years in the face of intense competition.
The final payment for the company will be about $1bn, but people familiar with the sale process said the payment would be staggered, with only half paid up front and the rest paid over three years, depending on improvements in operating standards at 65 Trust-Mart stores.
A person familiar with the deal said: “Most stores need to get up to scratch from a compliance perspective, so half the cash is being withheld until all matters are sorted. However, most of the issues are easily rectified.”
The rapid growth of the middle class in China’s more prosperous cities and the relatively immature retail sector has made the country an attractive market for big international retailers.
However, many retailers have found it hard to make profits because of the competition, particularly from strong local chains in specific regions and the low average spending of Chinese supermarket customers.
Wal-Mart has 68 hypermarkets in China, putting it behind Carrefour, which has 255 discount stores and 90 hypermarkets. However it has pledged to expand rapidly in China.
Wal-Mart, which pulled out of South Korea and Germany last year, has made China one of
the priorities for its international division, which is also strong in Central and South America.
Xu Xiaofang, analyst of Guotai Junan Securities in Beijing, said foreign retailers were increasingly looking to make acquisitions because the market in many cities was already saturated. “Acquisition is an effective way for foreign players to obtain good store locations or to avoid policy obstacles put up by local governments,” he said.
Other international chains looking to expand in China are Tesco of the UK, with a stake in Hymall hypermarket chain, and Metro, the German group.
“Through this investment in Trust-Mart we have the opportunity to expand in China, one of the world’s fastest-growing retail markets,” said Michael Duke, Wal-Mart’s vice-chairman.
Wal-Mart was advised by Credit Suisse on the deal, while UBS advised Bounteous.
Get alerts on US equities when a new story is published