Perhaps Walmart Should Go Private

The chance that Barnes & Noble (NYSE: BKS) has decided to consider taking itself private has spawned a cottage industry of picking the next retailers that will make a similar decision. Barnes & Noble shares rose more than 10% on the news of its plans. That means, experts would say, the decision to take the book retailer out of the public market will unlock its full financial potential. That may be true. It is also true that Barnes & Noble has a controlling shareholder which makes it easier to privatize the company without a huge struggle with its stockholders.

The list of retailers that might also go private usually includes Abercrombie & Fitch (NYSE: ANF) and long-suffering Radio Shack (NYSE: RSH), which has held the place at the bottom of the consumer electronics market for years. Both firms have stocks that trade below their 52-week lows, which would make them even more likely candidates to drop off the NYSE.

The trouble with these companies is that they do not all have sterling balance sheets. And, one of the critical liabilities all of them have is multi-year leases on their locations. Blockbuster found out what a significant problem this can be in a restructuring. Bankruptcy is the only viable way to relieve a retailer of this burden.

Walmart may be among the most likely retailers to go private. It has a market cap of $191 billion against annual sales of $400 billion and annual operating profits of $24 billion. The company could go private for as little as 8x that operating income. Walmart has $8 billion in cash and long-term debt of $32 billion, which means the company is not highly leveraged at all. It does have the store lease problem, but it has weeded out its weakest locations, so they are not likely to be a burden.

Walmart also has one very large block of shares owned by the relatives of founder Sam Walton. The family owns 1.6 billion shares, and holds enough of the voting class shares to give the board an important advantage if it wants to take the company private.

Nearly every publicly held retailer will look at the Barnes & Noble plan and as “what if?”. Most can answer the question right away–it won’t work.

Douglas A. McIntyre