Walmart (WMT) has announced that it has sold its UK grocery unit Asda to the Issa brothers and TDR for an enterprise value of £6.8 billion, on a debt-free and cash-free basis.
Under the new ownership structure, the Issa brothers and TDR Capital are acquiring a majority ownership stake in Asda. Walmart will retain an equity investment in the business, with an ongoing commercial relationship and a seat on the board, the company said.
The business will continue to be led by Roger Burnley who will form part of Asda’s Board alongside representatives appointed by the Issa brothers, TDR Capital and Walmart. The business has also committed to investing over £1 billion in the next three years in Asda to further strengthen the company and its supply chain.
“As well as accelerating Asda’s existing strategy, the Issa brothers will bring significant additional expertise, particularly in convenience retail and brand partnerships, drawing on their experience of building a global convenience retailer with more than 6,000 sites” WMT commented.
The transaction is subject to regulatory approvals and is expected to complete in H1 2021.
Based on the current deal terms, Walmart expects a non-cash loss of approximately $2.5 billion, after tax, in fiscal 2021. This does not include amounts related to Walmart’s ASDA pension plan settlement.
Walmart also disclosed that it expects earnings per share dilution of approximately $0.25 in the first full year following completion of the transaction, primarily reflecting the absence of net income associated with the ASDA business.
The use of cash proceeds will be determined at a later date, but the effects of those decisions are expected to at least partially offset the dilution, Walmart added.
Shares in the retail giant traded down 1.8% on Friday, with shares nonetheless up over 18% year-to-date. Meanwhile the Street shows a bullish stance with 22 Buy ratings versus 7 Hold ratings, adding up to a Strong Buy consensus. The average analyst price target stands at $149.
Oppenheimer analyst Rupesh Parikh recently raised the stock’s price target to $152 from $145 and maintained a Buy rating, saying that the bull case for Walmart remains intact, backed by continued aggressive investments within the business.
“We still see the case for outperformance driven by the potential to deliver at least LSD operating income growth and upside potential related to new investments,” Parikh told investors. “In coming years, we expect WMT to be one of the bigger beneficiaries related to retail dislocations in the brick & mortar landscape due in large part to the continued omni-channel investments.”
Commenting on the stock’s valuation, the analyst noted that on a relative P/E basis, WMT shares trade at 1.18x below recent peaks. “These metrics do not capture successful digital investments to date such as JD.com and Flipkart,” he added. (See Walmart’s stock analysis on TipRanks).