Walmart Buys India E-commerce Group, Flipkart, For $16B

by Ike Obudulu Posted on May 9th, 2018

Bentonville, Arkansas, USA and Bengaluru, India: Walmart Inc. (NYSE: WMT), the world’s largest retailer, announced, Wednesday, that it has signed definitive agreements to become the largest shareholder in India’s Flipkart Group (“Flipkart”). The investment will help accelerate Flipkart’s customer-focused mission to transform commerce in India through technology and underscores Walmart’s commitment to sustained job creation and investment in India, one of the largest and fastest-growing economies in the world, Walmart said.

Subject to regulatory approval in India, Walmart will pay approximately $16 billion for an initial stake of approximately 77 percent in Flipkart, formally Flipkart Private Limited. The remainder of the business will be held by some of Flipkart’s existing shareholders, including Flipkart co-founder Binny Bansal, Tencent Holdings Limited, Tiger Global Management LLC and Microsoft Corp. 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.

Closing is expected later this calendar year, subject to regulatory approval.

“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,” said Doug McMillon, Walmart’s president and chief executive officer. “As a company, we are transforming globally to meet and exceed the needs of customers and we look forward to working with Flipkart to grow in this critical market. We are also excited to be doing this with Tencent, Tiger Global and Microsoft, which will be key strategic and technology partners. We are confident this group will provide Flipkart with enhanced strategic and competitive advantage. Our investment will benefit India providing quality, affordable goods for customers, while creating new skilled jobs and fresh opportunities for small suppliers, farmers and women entrepreneurs.” Walmart said

“This investment is of immense importance for India and will help fuel our ambition to deepen our connection with buyers and sellers and to create the next wave of retail in India,” said Binny Bansal, Flipkart’s co-founder and group chief executive officer. “While eCommerce is still a relatively small part of retail in India, we see great potential to grow. Walmart is the ideal partner for the next phase of our journey, and we look forward to working together in the years ahead to bring our strengths and learnings in retail and eCommerce to the fore.” Walmart added.

Founded in 2007, Flipkart has led India’s eCommerce revolution. The company has grown rapidly and earned customer trust, leveraging a powerful technology foundation, including artificial intelligence, and emerging as a leader in electronics, large appliances, mobile and fashion and apparel. In a market where Walmart expects eCommerce to grow at four times the rate of overall retail, and with well-known platforms such as Myntra, Jabong and PhonePe, Flipkart is uniquely positioned to leverage its integrated ecosystem, which is defined by localized service, deep insights into Indian customers and a best-in-class supply chain. Flipkart’s supply chain arm, eKart, serves more than 800 cities, making 500,000 deliveries daily. In the fiscal year ended March 31, Flipkart recorded GMV of $7.5 billion1 and net sales of $4.6 billion representing more than 50 percent year-over-year growth in both cases. 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.

While Walmart and Flipkart will leverage the combined strengths of both companies, they will maintain distinct brands and operating structures. Currently, Walmart India operates 21 Best Price cash-and-carry stores and one fulfillment center in 19 cities across nine states in India, with more than 95 percent of sourcing coming from India, aiding suppliers, creating skilled jobs and contributing to local economies across the country. Krish Iyer, president and chief executive officer of Walmart India, will continue to lead that part of the business.

“Flipkart has established itself as a prominent player with a strong, entrepreneurial leadership team that is a good cultural fit with Walmart,” said Judith McKenna, president and chief executive officer of Walmart International. “This investment aligns with our strategy and our goal is to contribute to India’s success story, as we grow our business. Over the last 10 years, Flipkart has become a market leader by focusing on customer service, technology, supply chain and a broad assortment of products. With Flipkart and the other shareholders who have come together, we will continue to advance the winning eCommerce ecosystem in India.”

With retail changing rapidly, Walmart is actively looking for new ways to serve customers and moving with speed. The Flipkart investment represents a unique opportunity, consistent with the approach of looking for innovative ways to grow domestically and internationally, particularly in markets with significant long-term opportunity. The Flipkart investment transforms Walmart’s position in a country with more than 1.3 billion people, strong GDP growth, a growing middle class and significant runway for smartphone, internet and eCommerce penetration.

Structure, Financial Implications and Other Details

Walmart’s investment includes $2 billion of new equity funding, which will help Flipkart accelerate growth in the future. Walmart and Flipkart are also in discussions with additional potential investors who may join the round, which could result in Walmart’s investment stake moving lower after the transaction is complete. Even so, the company would retain clear majority ownership. Tencent and Tiger Global will continue on the Flipkart board, joined by new members from Walmart. The final make-up of the board has yet to be determined, but it will also include independent members. The board will work to maintain Flipkart’s core values and entrepreneurial spirit, while ensuring it has strategic and competitive advantages.

To finance the investment, Walmart intends to use a combination of newly issued debt and cash on hand. Upon closing, Flipkart’s financials will be reported as part of Walmart’s International business segment. If the transaction were to close at the end of the second quarter of this fiscal year, Walmart expects a negative impact to FY19 EPS of approximately $0.25 to $0.30, which includes incremental interest expense related to the investment.
In FY20, as Walmart looks to accelerate growth in this important market, Walmart anticipates an EPS headwind in total of around $0.60 per share, comprised of:

Operating losses of approximately $0.40 to $0.45 per share, assuming minimal tax benefit for losses in the near to mid-term. This amount includes about $0.05 per share related to amortization of intangible assets and depreciation of short lived assets resulting from purchase accounting, which will only last for a few years post-closing.
Interest expense of approximately $0.15 per share.

Given the company’s financial strength, Walmart anticipates the continuation of it’s current share buyback program while maintaining a strong credit profile.

This investment represents a unique opportunity in a market with significant long-term growth prospects. Walmart is investing in a local leader with strong leadership and a culture of innovation and service, and the company is aligned with a strategic and committed shareholder group focused on serving customers. In the mid to long term, as the business scales and efficiencies are realized, Walmart expects losses to decline and returns to improve.

The investment in Flipkart becomes the biggest-ever that Walmart has made in its history, supplanting Asda in the UK (which it last week partially divested).

The deal comes after many months of speculation about a tie-up between Flipkart and Walmart, which reached a fever pitch this morning when Softbank CEO Masayoshi Son accidentally let the news of the finalised deal slip out in an investor presentation. He termed it an “acquisition” and sure enough, Softbank is selling its stake in the transaction, so it has exited the investment, one of its biggest in India to date.

Walmart’s stake in Flipkart also sets up India as the latest battleground between the retailer and Amazon. Amazon also had been rumored to be interested in taking a stake in Flipkart as recently as last week. Amazon has already invested billions into its operations in India — a move that had already heightened competition, impacted e-commerce operators’ margins, and had directly impacted Flipkart’s prospects (a 2017 investment was made as a “downround” for example).

Please note that Walmart’s announcement, Wednesday, contains forward-looking statements as to Walmart management’s guidance regarding the earnings per share impact of Walmart’s investment in Flipkart for the fiscal year ending January 31, 2019, and the subsequent fiscal year and as to the future operations of Flipkart, as well as statements by Walmart about its share buyback program and its credit profile.

Such “forward-looking statements” fall within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, that are intended to enjoy the protection of the safe harbor for forward-looking statements. Walmart’s actual results may differ materially from the guidance provided as a result of changes in circumstances, assumptions not being realized or other risks, uncertainties and other factors, including: the closing date for Walmart’s investment in Flipkart; the level of Walmart’s investment in Flipkart from time to time; currency exchange rate fluctuations; changes in market interest rates; competitive pressures and other economic, geo-political, capital markets and business conditions, trends and events in India; changes in existing rules and regulations regarding foreign direct investment in the retail business in India; other changes in existing tax, labor or other law or regulations in India; and other risks, uncertainties and factors relating to Walmart’s operations and financial performance discussed in its filings with the SEC.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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