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Mexican Bribery Charges Could Cost Wal-Mart $4.5 Billion; Shares Down 4.8%

By Abram Brown | Forbes | Apr. 23, 2012

Wal-Mart shares plunged nearly 5% in pre-market trading this morning, as investors weighed allegations that Wal-Mart officials bribed Mexican officials to quicken growth and then tried to cover up the corruption.

Executives from Wal-Mart’s Mexican subsidiary reportedly used systematic bribery to receive building permits across the country, according to The New York Times story that broke the news Saturday. After Wal-Mart learned about the bribes, it stalled an internal investigation into the situation and failed to promptly report the problems to the government. The Wal-Mart executive described by The Times as the man directing the illegal operations, Eduardo Castro-Wright,  now serves as a vice president at the company, set to retire in July.

Wal-Mart is meeting with the Justice Department and the Securities and Exchange Commission. If the allegations prove true, Wal-Mart violated the Foreign Corrupt Practices Act (FCPA), legislation that allows investigators to charge a U.S. company with bribing overseas officials. After a decade of carefully encouraging companies to report misbehavior early, the Justice Department may be under pressure to make an example of Wal-Mart.

“We take compliance with the U.S. Foreign Corrupt Practices Act very seriously and are committed to having a strong and effective global anti-corruption program in every country in which we operate,” company spokesman David Tovar said in a statement.

A UBS analysis of past FCPA violations show a typical investigation slogs on for two to six years with little day-to-day impact on the offending company’s operations. Past SEC and Justice Department penalties are usually about 1% to 2% of annual sales. In 2011, this would mean at least a $4.5 billion, or 77 cents per share, penalty for Wal-Mart, the world’s largest retailer and the biggest private employer in Mexico.

The greater impact will be on Wal-Mart’s Mexican growth. A slowdown in new store openings could mean a 5% decrease in growth, a $1.3 billion loss, according to the UBS analysis. Wal-Mart has beaten rivals to the Mexican market. Its store count there has soared 135% in five years, as the market now accounts for 6% of total revenue.

Wal-Mart stock has lagged behind the broader market rally since 2009. Wal-Mart has rebounded about 25%, nearly a third of the growth experienced by the S&P 500 index. The retailer, which competes with such companies as Target, Costco and Sears Holding, trades at 14 times trailing earnings.

“The headline risk that had been wrung from Wal-Mart’s shares, say from 2008 to last week, looks to be back in the fold,” says Brian Sozzi, NBG chief equities analyst.

Wal-Mart shares were down 4.8%, at 8:50 a.m., to $59.55.


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Tags

Mexico, Corruption, Wal-mart, Bribe

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