Walmart closes $16 billion deal for Flipkart

Walmart has completed its largest acquisition in company history in terms of price — $16 billion — for Indian startup Flipkart. The Bentonville-based retail giant announced Saturday (Aug. 18) the deal had closed giving it 77% ownership in Flipkart with the remainder being held by shareholders including co-founder Binny Bansal, Tencent, Tiger Global and Microsoft.

The deal is expected to be accretive to Walmart shareholders long-term. This year, the company expects earnings per share will be dinged by as much as 30 cents per share. Next year, the impact is expected to be about 60 cents per share.

“Walmart and Flipkart will achieve more together than each of us could accomplish separately to contribute to the economic growth of India, creating a strong local business powered by Walmart,” said Judith McKenna, president and CEO of Walmart International. “Our investment will benefit India by providing quality, affordable goods for customers, while creating new skilled jobs and opportunities for suppliers. As a company, we are transforming globally to make life even easier for customers, and we are delighted to learn from, contribute to and work with Flipkart to grow in India, one of the fastest-growing and most attractive retail markets in the world.”

Walmart said Flipkart’s financials will be reported as part of Walmart International. McKenna told the media in June the deal is exciting because the opportunity long-term is unparalleled in the world. Flipkart’s existing management team will continue to lead the business. Tencent Holdings Limited and Tiger Global Management LLC will remain represented on the Flipkart board, in addition to independent board members, and will be joined by new members from Walmart.

McKenna said Walmart has been looking at India and waiting or the right time to take the plunge with respect to e-commerce. McKenna said e-commerce has just 2% market penetration in India, but is poised to quickly accelerate.

“Flipkart is not just another e-commerce retailer. They have created a platform operating in the market from a position of strength,” McKenna said.

She said Flipkart was also attractive because of its ancillary segments — two fashion businesses, an e-cart final mile logistics arm, and an open-source phone pay platform that allows for peer-to-peer payments.

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 e-commerce penetration, Walmart noted in the release. The retailer said as it scales in India, it hopes to create sustained economic growth across agriculture, food and retail.

Future investments by Walmart will support national initiatives and will bring sustainable benefits in jobs creation, supporting small businesses, supporting farmers and supply chain development and reducing food waste, the company noted. Walmart’s investment includes $2 billion of new equity funding to help accelerate the growth of the Flipkart business. Both companies will retain their unique brands and operating structures in India.

“We are poised and ready to deliver the full value of this partnership for India,” Flipkart CEO Binny Bansal said. “By combining Walmart’s omni-channel retail expertise, supply-chain knowledge and financial strength with Flipkart’s talent, technology and local insights, we are confident that together we can drive the next wave of retail in India.”

Wall Street has been mixed on the benefits of Flipkart for investors given the price-tag for a company that has yet to turn a profit. In June, Walmart CEO Doug McMillon addressed analysts’ questions about the deal. He said you often don’t get to pick the timing of opportunities. He said with the solid growth in the U.S. business providing a strong financial foundation, the company felt this investment for the future was worth the short-term risk to earnings.

“In India, it’s worth it. I believe we will look back five to 20 years from now and say it was a bold bet, but it was worth it. We are not running this thing for a year, we’re looking for long term success,” McMillon told analysts following the company’s shareholder meeting in June.

Stephens Inc. analyst Ben Bienvenue remains overweight on Walmart Stores following this deal saying while the financial impact is more significant than expected, the value of the asset warrants the investment.

“In our opinion, as Walmart shows it is serious about competing in the global e-commerce marketplace, we remain overweight on the stock with a price target of $115,” Bienvenue said.

Annibal Sodero, professor of supply chain at the University of Arkansas, said growing through acquisition is the best way for Walmart to expand its international footprint and the deal for Flipkart makes sense following that strategy.

“Walmart is not going to find a perfect glove to fit their hand, so they have to make strategic plays when they can do so,” Sodero said. “One thing for certain is that Walmart is going to have to invest in acquisitions to grow e-commerce share against the likes of Amazon and Alibaba.”