By  on September 27, 2010

Wal-Mart Stores Inc. is kicking the tires at Johannesburg-based retailer Massmart Holdings Ltd.

The world’s largest retailer said it had made a preliminary and nonbinding proposal to acquire the firm for 148 South African rand a share, or $20.94 at current exchange. That would be about $4.2 billion to buy the firm’s 288 stores across 14 countries in sub-Saharan Africa, though most of the stores are in South Africa. Massmart granted Wal-Mart a period of exclusivity to complete due diligence.

“South Africa presents a compelling growth opportunity for Wal-Mart and offers a platform for growth and expansion in other African countries,” said Andy Bond, executive vice president of Wal-Mart, who oversees the company’s operations in the region.

But Wall Street was skeptical.

Janney Capital Markets analyst David Strasser pointed to the price tag in a research note titled, “Wal-Mart Continues Its Attempt to Conquer the World.”

“We get their desire to use this as a springboard to grow, particularly in sub-Saharan Africa,” he said. “However, the offer at 13 times [earnings before interest, taxes, depreciation and amortization]…does make this another region where returns will lag for years to come.”

Sub-Saharan Africa has also struggled with geopolitical and economic problems for decades.

“For every relatively stable country like Botswana, there is a Zimbabwe,” Strasser said.

Deutsche Bank analyst Bill Dreher Jr. had a more positive take in his note, “Building a Beachhead in Africa.” He said Wal-Mart would gain a “first-mover advantage” by being the only major global retailer in the market.

Investors were optimistic that Wal-Mart would ultimately increase its offer and drove Massmart shares up 10.6 percent to 149 South African rand, or $21.08, in Johannesburg Monday.

Wal-Mart’s stock fell 1.1 percent to $53.48 Monday as the Dow Jones Industrial Average sank 0.4 percent, or 48.22 points, to 10,812.04. The S&P Retail Index split the difference between the two and slipped 0.6 percent, or 2.77 points, to 457.84.

Among the other retail decliners for the day were Aéropostale Inc., down 2.4 percent to $22.83; Saks Inc., 1.9 percent to $8.49; Ross Stores Inc., 1.8 percent to $55.43, and Target Corp., 1.2 percent to $54.39.

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