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Walmart Buying Controlling Stake In Flipkart

Zacks

Every time Amazon AMZN goes after a market, it scares the living daylights out of all players there. So as Jeff Bezos gets ready to pump another $5 billion into the Indian ecommerce market, other players are scrambling to get their games together.

As things stand now, Amazon and Flipkart together account for 80% of the market, with Snapdeal a struggling third and other players making up the rest. Flipkart is still the market leader, but Amazon’s deep investment strategy of pumping in endless amounts of cash to grow its business and then seeming to wait forever for the return to the bottom line is enough to scare competitors.

So confirming rumors that have been doing the rounds for at least a year, Reuters reports that Walmart WMT has finally come to a deal with current Flipkart shareholders to buy a controlling stake in the company that values it at around $20 billion.

Walmart is buying a 50% stake with Alphabet GOOGL buying another 10-15%. The remaining shareholders will be Flipkart co-founder Binny Bansal, China's Tencent Holdings Ltd, Tiger Global Management LLC and Microsoft Corp. MSFT. It was agreed that Flipkart would also be able to raise an additional $2 billion through an equity issue.


The biggest exiting shareholder is Softbank, which has been increasing its investment in Indian payments and ecommerce startup Paytm after things didn’t work out at Snapdeal. Softbank will acquire a 21% stake in Paytm Ecommerce after investing $400 million into the company in four tranches. Paytm is strongly backed by China’s Alibaba, which will also bring an additional $45 million in this funding round. Softbank would like to merge Paytm and Snapdeal for a reasonable return on its investment in the company, but Alibaba isn’t biting that yet.

So the money is currently on Amazon, Flipkart/Walmart and Paytm.

Since the deal makes Walmart the largest and controlling shareholder, it will be good for Flipkart in terms of cash and inventory. Alphabet’s investment is also interesting because it can take care of the technology side of things, including the emerging voice controlled commerce segment. Both Amazon and Google have launched their voice activated smart assistant devices in India this year.

For Walmart, it is a much-needed position in what is one of the fastest growing ecommerce markets in the world. Being the only company that can perceivably challenge Amazon in size, retail experience and resources, this promises to be a vital step forward. In 2019 however, the acquisition is expected to result in a 25-30 cent dilutive impact on earnings.

Read about the regulatory backdrop here.

Recommendations

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You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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