FREE

Event update: Retail; Walmart’s acquisition of Flipkart – A new chapter to the e-retail battle

Event

Walmart Inc. has signed definitive agreement to acquire 77% stake in Flipkart Private Ltd for an investment of $16bn.

Details

Deal Contours - The deal involves investment of $16bn by Walmart Inc, which includes stake purchase from existing shareholders as well as new equity funding of $2bn to Flipkart Private Ltd, making it the largest stakeholder with initial ownership stake of ~77%. The balance stake will be held by existing shareholder including Flipkart co-founder Mr Binny Bansal, Tencent Holdings Limited, Tiger Global Management LLC and Microsoft Corp. Both the parties are also evaluating additional potential investors which could bring down Walmart’s stake post completion of the deal. However, Walmart will retain clear majority ownership. The deal is expected to be completed in the latter half FY19, subject to regulatory approvals.

Industry potential – As per Walmart’s analysis, the e-commerce market in India is expected to grow at a CAGR of 36% over FY18-23E, which is 4x the growth in total retail segment in India, resulting in e-commerce penetration levels increasing to 6.2% in FY23E from current levels of 2.1%. The growth will be driven by improving GDP growth, rising share of millennials, increasing internet and smartphone penetration in India.

Key financials - Founded in 2007, Flipkart enjoys leadership position in terms of GMV share in Fashion, Mobile and Large appliances while it is the No 2 player in the Electronics segment. Over the period FY14-18, company’s active customers have grown 7x to 54m while GMVs have grown ~12x to $7.5bn.  For FY18, net sales grew by 50% yoy to $4.6bn. Based on Walmart’s estimate of impact on EPS (operating losses of $0.4-0.45/share), Flipkart’s operating losses are estimated at ~Rs80-90bn in FY20E.

Synergy benefits - In terms of synergies, Walmart will bring in its expertise in terms of retail supply chain as well as its global sourcing strength in certain categories like foods. Walmart on the other hand will learn from Flipkart’s capabilities in terms of logistics (Logistics arm Ekart), wallet/payment (PhonePe application), strong technology team and strength in the apparel segment. These learnings can then be implemented in other countries where Walmart is present. Moreover, the Walmart management highlighted that they will completely support Flipkart’s growth strategy as well as its ambition to transition into a publicly-listed, majority-owned subsidiary in future.

Impact and View

The regulatory challenges of investing in physical retail for Walmart have led to the global retail behemoth being present in India only through 21 cash and carry stores thus far. However, given its size and growth dynamics, winning in India would be a priority for a player like Walmart. Flipkart’s strong expertise in e-commerce, leading position in fast growing categories and experienced management team, makes it an investment that would give Walmart a play on Indian retail growth. The Indian retail industry has seen a spate of mergers & acquisitions over the last couple of years in both the online as well as offline segment. A transition to an eventual listing for Flipkart implies an eventual path to profitability which will require lower discounting. However, in the near to medium term, we expect intensity of discounting to remain elevated as both the players (Amazon and  Walmart-Flipkart) will aggressively focus on driving growth, ramping up scale (including nacent categories like fresh) and gaining market share given that both players have adequate war chest to fund the same. We believe this could keep discount days in offline retail elevated, limiting margin expansion.  Also, it could increase activity on the online FMCG and food retail space which is an area where online retailers have struggled. Over the long term, it can trigger further consolidation or strategic tie-ups between online and offline players (Amazon and Shoppers Stop is an example) as having an omni-channel presence and wide portfolio basket, becomes critical to capture market share as well as drive profitability.