Walmart Inc Sells Walmart Brazil for $0 … And It’s a Smart Deal

The deal is actually a sign that the company is getting serious about focusing on growth opportunities

Adaptability and innovation keeps Walmart stock relevant

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Walmart Inc (NYSE:WMT) has certainly been busy lately. The latest major move: The company announced it was selling an 80% stake in its Brazilian operation to Advent International Corp, a top private equity firm. WMT will retain the remaining 20%. The advisors on the transition included Goldman Sachs Group Inc (NYSE:GS) and Credit Suisse Group AG (ADR)(NYSE:CS).

The story of Walmart’s efforts in Brazil are far from encouraging.

Since the mid-1990s, the company has had challenges in adapting to the nuances of the local markets in the country as well as the fierce competition. While Walmart did  build a large presence — becoming the No.3 player — the business was not growing enough. It also did not help that Brazil has been an economic mess (although, the situation did improve during the past year or so).

In light of all this, WMT agreed to sell Walmart-Brazil for … $0.

No joke! Basically, the operation was more of a liability than an asset. In fact, WMT will be taking a $4.5 billion net loss on the transaction, due mostly to cumulative foreign currency losses. Yet if certain milestones are hit, WMT will get $250 million — which is basically chump change.

Now Advent looks to be a spot-on partner. Keep in mind that the firm has over 20 years experience in Brazil, with over 30 investments in the country. More importantly, it can also look for cost cuts and restructuring opportunities. Yes, such things are what private equity firms are good at.

So what does this all mean for WMT stock? Well, on the surface, it seems like there are few positives. But I think ultimately this move will prove to be the right one. If anything, it should bolster the bullish case for WMT stock.

The main reason: Even though the company has tremendous scale, it still must do a better job in allocating its resources. So if Brazil is proving too difficult, why not let a partner manage it?

Note that this is not the only example of this. Back in April, WMT sold its UK grocery business, Asda Group Ltd., to J Sainsbury plc (ADR)(OTCMKTS:JSAIY) for roughly $10.1 billion. The result was that the company received 42% of the combined operation. With the move, WMT got a slug of cash and a strong partner to take on the tough competition in the market.

WMT Stock And The Growth Imperative

By striking deals for Asda and Walmart-Brazil, WMT can focus on growth opportunities. And this means investing heavily in ecommerce.

A prime example of this is WMT’s ambitious $16 billion acquisition of Flipkart Group, which is India’s largest ecommerce operator. The deal — which will result in a 77% equity stake — is a big statement again rival, Inc. (NASDAQ:AMZN). The boldness of the moves is something straight out of the playbook of Jeff Bezos.

The opportunity for ecommerce in India is definitely very attractive. Currently a mere 15% of the 1.3 billion people in the country shop online. Something else: the market is expected to go from $38 billion today to $200 billion over the next decade.

As for Flipkart, it has built a standout platform. Founded in 2007, the company has been a fast-grower, with net sales jumping over 50% during the past fiscal year to $4.6 billion. Flipkart has also developed sophisticated mobile apps — powered by AI (Artificial Intelligence) — and an extensive supply chain.

Bottom Line on WMT Stock

Despite all this activity, WMT stock has been a poor performer this year. Shares have gone from a high of $110 to $85.

But this does really look like a value opportunity. Consider that the forward price-to-earnings ratio is at a reasonable 17x and the dividend yield is at 2.4%.

Although, more importantly, the company is willing to make the necessary changes to become a force in ecommerce. And while this will not be cheap, the strategy is what is needed to revive growth.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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