US-based retail giant Walmart Inc said Wednesday it will invest $16 billion to acquire a 77 per cent stake in Indian e-commerce major Flipkart, a deal that is the biggest M&A (merger and acquisition) in India so far, higher than the $12.9-billion acquisition of Essar Oil by a consortium led by Russia’s Rosneft in 2016.
The deal marks the entry of Walmart into the Indian consumer retail business and gives it the ability to leverage Flipkart’s customer insight into the Indian market and its strength areas such as the fashion apparel segment and smartphones.
Flipkart, which is pitted in a neck-and-neck battle for market leadership against Amazon, would be able to cash in on Walmart’s omni-channel retail expertise, grocery and general merchandise supply-chain knowledge and financial strength. The acquisition of Flipkart’s majority share will also add group companies such as online fashion retailers Myntra and Jabong, logistics firm Ekart, and digital payments firm PhonePe to Walmart’s portfolio. The deal would take the Bengaluru-based company’s valuation to nearly $21 billion.
Walmart’s investment, which primarily comprises purchase of Flipkart stock from existing shareholders that include Japan’s Softbank Group, online marketplace eBay, South African technology firm Naspers and Flipkart co-founder Sachin Bansal, will include $2 billion of new equity funding.
The transaction, subject to clearance from Competition Commission of India and other regulators, will make India the biggest emerging market with players having majority interest from US-based Amazon, China’s Alibaba and Walmart pitted against each other.
Walmart said that, along with Flipkart, it is in discussions with several other investors to join the funding round, something that could see Walmart’s stake being reduced by the time the transaction closes. Even so, the company would retain clear majority ownership. Tencent and Tiger Global will continue on the Flipkart board, joined by new nominees from Walmart. The final make-up of the board has yet to be determined but it will also include independent members,Walmart said in a statement.
While the board composition of Flipkart is yet to be determined, the company’s leadership is said to remain the same with Binny Bansal continuing as Flipkart Group CEO and Kalyan Krishnamurthy continuing as CEO of Flipkart.com.
Walmart shares slumped more than 4 per cent in the morning trade on Wednesday wiping off nearly $10 billion from its market capitalisation, as the company warned its investors the Flipkart deal would dent earnings. The retailer said it expects the transaction to hurt its fiscal 2019 earnings per share by 25 cents to 30 cents, if the deal closes as expected. Upon closing, Flipkart’s financials will be reported as part of Walmart’s International business segment. In the year ended March 31, Flipkart recorded gross merchandise value of $7.5 billion and net sales of $4.6 billion, recording over 50 per cent year-over-year growth in both metrics. The online retailer has 54 million active customers.
The deal presented a lucrative exit opportunity for Softbank, which acquired 20 per cent stake in Flipkart last August for $2.5 billion. Softbank chief executive officer Masayoshi Son, at an investor presentation early Wednesday, said his firm’s investment in the Indian online retailer had grown to $4 billion. In separate statements, Naspers said it has parted with its entire 11.18 per cent stake in Flipkart for $2.2 billion, while eBay said it has sold its stake for approximately $1.1 billion. eBay’s stake sale also terminates its commercial agreements with Flipkart’s along with the latter’s licence to use the eBay.in
Further, US-based investment fund Tiger Global was also understood to be paring its stake in Flipkart, which was about 20 per cent before the deal. However, it was not clear how much of Tiger Global’s share in Flipkart will be picked by Walmart.
The deal with Walmart, which is expected to be concluded by the end of this calendar year, is seen as bolstering Flipkart’s position against rival Amazon – which through the $3-billion invested in India has come close to Flipkart in market share. Last month, ahead of the imminent Walmart-Flipkart deal, Amazon Inc infused Rs 2,600 crore in Amazon India.
Notably, Amazon was also learnt to have placed a bid to acquire 60 per stake in Flipkart while seeking a non-compete from Flipkart founders Sachin Bansal and Binny Bansal, both of whom are former Amazon employees.
Together, Flipkart-Myntra-Jabong hold 70 per cent market share of the online fashion business in India. Last year, Flipkart also purchased the India operations of global online retailer eBay. “While the immediate focus will be on serving customers and growing the business, Walmart supports Flipkart’s ambition to transition into a publicly listed, majority-owned subsidiary in the future,” the Bentonville, Arkansas-based retailer said.
“With the investment, Flipkart will leverage Walmart’s omni-channel retail expertise, grocery and general merchandise supply-chain knowledge and financial strength, while Flipkart’s talent, technology, customer insights and agile and innovative culture will benefit Walmart in India and across the globe,” Walmart added.
“India is one of the most attractive retail markets in the world, given its size and growth rate, and our investment is an opportunity to partner with the company that is leading the transformation of e-commerce in the market,” said Doug McMillon, Walmart’s president and chief executive officer. Walmart investment, he said, will benefit India by providing quality, affordable goods for customers, while creating new skilled jobs and fresh opportunities for small suppliers, farmers, and women entrepreneurs.
However, the Confederation of All India Traders (CAIT) said the deal “is nothing but a clear attempt to control and dominate the retail trade in India by Walmart through e-commerce in the long run”. “Digitally powered e-Walmart will certainly vitiate the e-commerce and retail market. There will be an uneven level playing field to the disadvantage of retail traders. Only the venture capitalist, investors and promoters will be benefitted and not the country,” CAIT said in a statement. JP Morgan Securities acted as the lead financial advisor for Walmart along with Barclays. For Flipkart, Goldman Sachs acted as the financial adviser for the transaction.