Investment opportunity for Wal Mart:

1
Investment opportunity for Wal Mart

• Carrefour

2
Introduction

• Wal Mart is indisputably the world leader of the
  retail sector
• The purchase of its challenger would make sense
  from an industrial point of view
• Their retail networks prove a geographical
  complementarity
• No Carrefour stores in the US
• No WM stores in France
• The merger would enable cost synergies
• Cuts in head office costs
• Decrease in the costs of goods sold thanks to an
  increasing bargaining power towards suppliers
• Carrefour is listed on the Paris stock exchange.
  Therefore, the purchase of a controlling stake
  requires the launching of a tender offer
• Either in cash (take over bid)
• Or in shares
• Or in the background of a mix offer
• The market cap of Carrefour is around 36 bn
  (ie 50 bn )

3
Cash offer Balance sheet impacts

• Assumed premium 20
• Carrefour valuation 60 bn ( corresponding to
  an increase in the net financial debt)
• Based on a 15 bn equity, the implied goodwill
  would be 45 bn
• Carrefour would be fully consolidated by WM then
  WM would have to consolidate Carrefour existing
  debt (10 bn )
• The implied gearing ratio is unacceptable for the
  banks (166 vs a target 100 ratio)

4
Cash offer EPS accretion/dilution

• Assuming a 100 shareholding in Carrefour
  (following a tender offer and a squeeze out), WM
  would
• Consolidate 100 of Carrefours net profit
• Pay interest expenses based on a 5 pretax cost
  of debt
• The following table presents the sensitivity of
  the EPS accretion/dilution rate to the premium
  offered and to the pretax cost of debt
• In spite of a significant accretive impact (6 in
  the base case) a takeover bid is not possible
  because of the constraints of the banks

5
Share offer Balance sheet impacts

• Assumed premium 20
• Carrefour valuation 60 bn ( corresponding to
  an increase in WM equity)
• Based on a 45,61 price per WM share, WM would
  issue 1327 million new shares
• Based on a 15 bn equity, the implied goodwill
  would be 45 bn
• Carrefour would be fully consolidated by WM then
  WM would have to consolidate Carrefour existing
  debt (10 bn )
• The implied gearing ratio is acceptable for the
  banks (38 vs a target 100 ratio)

6
Share offer EPS accretion/dilution

• Assuming a 100 shareholding in Carrefour
  (following a tender offer and a squeeze out), WM
  would consolidate 100 of Carrefours net profit
• The following table presents the sensitivity of
  the EPS accretion/dilution rate to the premium
  offered
• Whatever the premium on Carrefour, the share
  offer is always dilutive from an EPS point of
  view therefore only a mix offer can be
  contemplated on Carrefour

WM Net profit, group share
12 343
Number of shares before acquisition
4 068
EPS before tender offer
3,03
Cost of debt before tax
5
Tax rate
35
Cost of debt after tax
3,25
(additional net interest expense)
0
Target net profit
2 710
Wal Mart net profit after acquisition
15 053
Number of WM shares
Before acquisition
4 068
New shares issued
1 327
After acquisition
5 395
EPS post acquisition
2,79
EPS before acquisition
3,03
Accretion/Dilution rate
-8,04