Reuters
Wal-Mart to Sell Grocery Unit to Berkshire
Friday May 2, 12:36 pm ET
By Emily Kaiser
CHICAGO (Reuters) - Wal-Mart Stores Inc. (NYSE:WMT - News) on Friday said it agreed to sell its grocery distribution unit to Warren Buffett's (News) Berkshire Hathaway Inc. (NYSE:BRKa - News), passing off a slower-growing business that could thrive under new owners.
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The world's biggest retailer said the deal to sell McLane Co. Inc. would allow it to focus "completely" on its retail business. Wal-Mart expects the deal will trim its earnings for the next two years.
McLane, which represents just 6 percent of Wal-Mart's total sales and couldn't match Wal-Mart's massive retail expansion, was running into some conflicts as it tried to attract new customers because many compete with Wal-Mart.
"From the McLane perspective, this will create some opportunities for them that they cannot have being affiliated with Wal-Mart," Jay Allen, Wal-Mart's senior vice president of corporate affairs, said in a telephone interview.
Wal-Mart also said McLane sold its Merit Distribution Services Inc. trucking business to Swift Transportation Co. Inc. for about $50 million. Merit provides trucking services to Wal-Mart's grocery distribution centers and other companies.
The total purchase price was not disclosed, but Wal-Mart said it expects proceeds of about $1.5 billion from the two transactions.
Mark Miller, retail analyst with William Blair, said the deals would modestly lift Wal-Mart's growth rate because the retail side has been expanding much faster than McLane, and Buffett would likely have more success winning over customers that compete with Wal-Mart.
"It could be more valuable to him (Buffett) -- there's not a customer conflict," Miller said.
In the 13 years since Wal-Mart bought McLane, the retailer's store base has more than doubled and its sales are up 10-fold. Wal-Mart had only three Supercenters with grocery stores in 1990, and now has about 1,300. The number of Sam's Clubs has more than quadrupled to 525 since 1990.
SO MUCH FOR AHOLD RUMOR
McLane, which supplies Wal-Mart's Sam's Club warehouse stores, accounted for $14.9 billion of Wal-Mart's $244.5 billion in sales for the fiscal year ended in January 2003.
Wal-Mart recorded $25.8 billion in revenues for 1990.
In early afternoon trading on the New York Stock Exchange (News - Websites) on Friday, shares of Wal-Mart were up 18 cents, or 0.3 percent, at $56.12, reversing an early loss. Berkshire Hathaway's Class A shares were up $300, or 0.4 percent, at $70,100.
The deal quieted rumors that Wal-Mart might be interested in buying Ahold NV's (Amsterdam:AHLN.AS - News) U.S. Foodservice, which has been battered by accounting problems.
"The likelihood of (Wal-Mart) being interested in U.S. Foodservice now has gone to zero," said Andrew Wolf, an analyst who follows food distributors for BB&T Capital Markets.
That would be good news for other big players such as Sysco Corp. (NYSE:SYY - News), who were uncomfortable with powerhouse Wal-Mart playing a big role in the industry, he said.
"You just don't want Wal-Mart in your business. Period. That's the major take-away," Wolf said.
Sysco shares were up 41 cents, or 1.4 percent, at $28.91 on the NYSE.
The grocery distribution sector has been tainted by accounting problems at U.S. Foodservice and industry leader Fleming Cos. Inc. (Other OTC:FLMIQ.PK - News), which filed for bankruptcy in April after losing its biggest customer, Kmart Corp. (Other OTC:KMRTQ.PK - News).
But Wal-Mart has avoided the accounting pitfalls, tied to payments suppliers make to retailers in exchange for promoting their products. Wal-Mart doesn't accept those payments, known as vendor allowances.
McLane's management team will remain in place, and its headquarters will stay in Temple, Texas.
Bentonville, Arkansas-based Wal-Mart said the McLane deal would reduce earnings by about 1 cent per share in the current year, and 2 cents per share next year, excluding a one-time gain.
Berkshire Hathaway's holdings range from Dairy Queen ice cream restaurants to Geico insurance. The company sees "an excellent possibility" for expanding McLane's customer base. |
