Partnerships / Acquisitions

Walmart Seals The Deal With Flipkart For $16 Billion

Flipkart

After much speculation – and a fair amount of “will they, won’t they” – it looks like the deal is done: Walmart will be the majority owner of Indian eCommerce up-and-comer Flipkart, with a 77 percent stake.

All it will cost them is a cool $16 billion.

The news broke early Wednesday – possibly a bit earlier than either company would have preferred, as SoftBank CEO Masayoshi Son accidentally let the cat out of the bag during his firm’s earnings presentation.

“Walmart is purchasing Flipkart,” Son said in the presentation (he spoke in Japanese with a real-time translation provided by a SoftBank representative). “Last night there was the official announcement.”

Oops.

SoftBank, to their credit, did try to walk it back, after someone subtly handed the CEO a note during a break in the presentation. It’s fair to say that Son probably doesn’t have s second career as a poker player in his future.

“With regards to Flipkart, it’s not officially announced yet,” he told the assembled audience with what various news reports called a “weak smile.” “Maybe I should not have mentioned that … well, I can’t take it out!”

SoftBank carried on with the” no official announcement” line for a while, as Walmart and Flipkart remained silent – and exactly no one on the entire planet believed them.

Eventually, all parties involved gave in and told the world what it already knew: The deal is, in fact, on.

“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 transformation of eCommerce in the market,” Walmart CEO Doug McMillon said in a statement.

What the Deal Will Mean

For its part, Flipkart walks out of the deal with a valuation north of $20 billion, a promise of $2 billion in fresh investment from Walmart and “additional potential investors,” as Walmart CFO Bret Biggs noted.

Analysts also noted that the Indian firm could leverage its new parent – and their extensive nationwide network of wholesale outlets – to accelerate its planned expansion into the grocery market.

Flipkart will need its newfound massive war chest – and a powerful partner like Walmart – to fend off Amazon’s entrance into the world’s second largest country by population, representing an eCommerce opportunity that Morgan Stanley estimates will be worth $200 billion by 2026. Today, Euromonitor reports that online sales in India are currently growing about 35 percent a year, fueled by a rising middle class, demonetization and an increasing push toward urbanization.

Amazon has made no secret of its desire to establish a foothold in India, perhaps smarting at having been so thoroughly shut out of China by Alibaba and Tencent. Amazon CEO Jeff Bezos has committed to investing at least $5 billion in his company’s India business, and has often remarked on the “huge potential” in the country. Amazon has already brought its Prime video and music services to India, as well as its annual Prime Day blockbuster sale, as it has worked to challenge Flipkart.

There were also reports that Amazon was going to attempt to thwart Walmart’s big move on Flipkart with a big bid of its own – but this seems to be one case in which the bricks outperformed the clicks.

As for Walmart’s win – other than the joy of beating out Amazon – CEO McMillon called out Flipkart’s strong presence in sectors such as fashion, electronics and digital payments as major factors behind Walmart’s decision to buy the company.

“We’ve been looking at this business for some time. India needs no introduction; it’s a fantastically growing market. And it fits right in with our strategy,” Judith McKenna, Walmart’s international chief executive officer, said in a phone interview with Bloomberg shortly after the news went public.

Walmart also gets direct-to-consumer access in India, something it has been blocked from statute since entering the nation with its various wholesaling centers in 2009. At the time of that entrance, Walmart had hoped it would be able to work within the regulatory structure to build a direct-to-consumer business , but it seems instead they have elected to buy their way into one.

Investor Heartburn

The big news did not necessarily delight those in the investor class, who are concerned that Walmart has made such a massive bet on a company that has a much stronger historical track record for quickly burning through funds than for logging the kinds of solid profits that Walmart Inc. is known for.

“As Flipkart is expected to generate meaningful losses for at least the next few years, this is clearly an investment for the future,” Moody’s analyst Charles O’Shea wrote in a research note.

Walmart has not given any sort of timetable to profitability, saying only that Flipkart’s losses should decline “in the mid to long term.”

“It’s typical of a business like this that, as you scale up, you will have losses. We expect those losses to continue for a little while,” Walmart’s chief financial officer, Brett Biggs, said in a phone interview.

And while Walmart is comfortable, the market is not quite there yet. Walmart’s stock is trading down 4 percent on the announcement – and the S&P lowered Walmart’s outlook to negative from stable. Among the rating agency’s given reasons were increased leverage and risks stemming from the company’s spending to expand online and globally as it continues its share buyback program.

Local Reaction

While investors have been putting their hair out – and news outlets in the U.S. are buzzing about what the new world of eCommerce competition will look like now that an entirely new international front has opened – local reaction has been a bit more subdued.

“I don’t think anyone can know what the partnership will mean exactly for eCommerce in India,” Bipin Preet Singh, founder and CEO of mobile payments MobiKwik, told PYMNTS shortly after the news was announced.

Singh noted that whatever the outcome, news of a pair-up was extremely exciting, as it shows exactly how far India has come in evolving toward what he believes will eventually be one of the globe’s premier eCommerce hubspots.

“I think the digitization of India will be one of the most exciting stories of the early 21st century, and I think we are all privileged to be a part of it,” Singh noted.

As for the feelings on the street, the people had some extremely amusing commentary to make on Twitter, with various polls popping up as to what the firm’s “new name” should be. So far, Flipmart is slightly leading Walkart.

We’ll keep you posted on how the deal unfolds going forward.

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