Byline: Evan Clark

NEW YORK — Wal-Mart Stores Inc. thinks it can turn Japanese. It really thinks so.
The discount giant, which rules the retail roost domestically, has agreed to shell out approximately $46 million to acquire a 6.1 percent stake in The Seiyu Ltd., a Japanese supermarket and general merchandise retail chain with more than $8 billion in sales.
As part of the agreement, Sumitomo Corp., Seiyu’s largest shareholder with a 10.5 percent stake, will increase its holdings, paying $38 million for an additional 5.1 percent of the firm. The combined investment by the two companies for 11.2 percent of Seiyu represents about 42.5 million shares.
The deal — still subject to the approval of Seiyu’s shareholders — gives Wal-Mart the option to inject up to $2 billion into the retailer, raising its stake to a commanding 66.7 percent.
“That’s cheap,” said retail consultant Walter Loeb of the asking price for two-thirds of the firm. “Because of the poor economy in Japan and the poor consumer spending, Wal-Mart will certainly find itself attracting a lot of people looking for the value they offer.”
In a statement, Charles Holley, senior vice president and chief financial officer of Wal-Mart International, noted: “This transaction is designed to give us the opportunity to work closely with Seiyu and its management team, and to study the business opportunities in Japan more thoroughly.”
John Menzer, president and chief executive of the division, praised Seiyu’s management and commitment to value — a hallmark of Wal-Mart’s — and noted the discounter would be tapping Sumitomo’s “expertise, its solid business base and, in particular, its focus on the retail sector.”
A Wal-Mart spokeswoman added: “This is a way for us to get in and evaluate the market and take a good, hard look at the retail market in Japan. It is a cautious step. Rather than just jumping in, we’re testing the water.”
Wal-Mart shares moved up 28 cents, or 0.5 percent, Thursday to close at $62.27 in New York Stock Exchange trading.
In a research note, UBS Warburg analyst Linda Kristiansen wrote that, at first glance, “this is a well-structured deal that provides Wal-Mart an excellent vehicle to gain expertise in a previously untapped market.”
Unlike Wal-Mart’s venture with Mexican retailer Cifra in the mid-Nineties, Kristiansen noted, Wal-Mart locked in prices for future investments at the outset with Seiyu. With Cifra, she pointed out, Wal-Mart “was paying for the additional operating knowledge it had contributed to the Cifra joint venture.”
J.P. Morgan Securities analyst Shari Schwartzman Eberts, in a note, agreed that locking in the price was a good idea since “bidding wars typically erupt when Wal-Mart expresses interest in a company or market entry.”
Eberts added: “While the Japanese market remains quite challenging and Seiyu is a financially troubled retailer, we view this transaction positively, as it is a relatively low-risk way for Wal-Mart to learn the Japanese market and sets up a relatively low-cost way for them to enter into Japan in a larger way if Wal-Mart chooses to do so over time.”
The graduated entry into a foreign marketplace has also been established by European retailers such as Tesco PLC, which inched into Eastern Europe and the Far East.
Legg Mason analyst Sally Wallick noted: “Some of Wal-Mart’s international expansion has been very challenging — Germany has been a challenge, though they seem to be making progress there.”
She described Wal-Mart’s method of easing into the market “prudent,” but said it isn’t necessarily “a template for what they will do in the future internationally because every market is different.”
According to the Seiyu Web site, apparel accounted for 21.6 percent of the firm’s sales for the year ended Feb. 29, 2000. Women’s wear generated 7.3 percent of the firm’s total sales for the year and men’s 3.4 percent. Still, food makes up the lion’s share, or 47.3 percent, of Seiyu’s sales. The company rates as the fifth-largest supermarket retailer in Japan and has about 400 stores worldwide, with a particularly strong market presence in and around Tokyo.

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