Life after divorce: What next for Bharti and Walmart?

After US-based Walmart and India’s Bharti Enterprises decided to call off their retail joint venture, attention is now turning to what the two companies will do next, given that both have said that they still plan on being a part of India’s retail market.

For Bharti, its front-end retail ’easyday’ chain of stores will be the mainstay till it forges a new alliance with a foreign partner, while Wal-mart will focus onthe 20 ‘Best Price’ cash-and-carry stores it runs in India, spread across an area of just over 1 million square feet.

On Wednesday, Walmart ended its six-year partnership with Bharti Enterprises blaming restrictive overseas investment rules.However,the decision to part ways is being called a calculative move by the US giant because the split will allow it to return to the Indian front-end retail business with a clean slate, without the burden of any Enforcement Directorate probe or investigation under America’s Foreign Corrupt Practices Act (FCPA) that had stopped all expansion.

The split leaves the Indian company without a partner and saddled with a network of 202 mostly bleeding ‘Easyday’ retail stores.It can now expand its Easyday stores at its own pace and wait for the right time to tie up with other global players.

[caption id=“attachment_1148137” align=“alignleft” width=“380”] Bharti Walmart runs 20 Best Price Modern Wholesale stores. Reuters[/caption]

>As part of the proposed transactions, Bharti will acquire the $100 million compulsory convertible debentures held by Walmart in Cedar Support Services, a company owned and controlled by Bharti.The debentures were sold by the Indian company at a time when foreign direct investment (FDI) wasn’t allowed in supermarkets.

This development implies that the American chain will not open retail stores in India anytime soon.

Walmart will buy out Bharti’s 50 percent stake in the cash-and-carry business to take over the full wholesale operation in the country. “Wal-mart is likely to give Bharti Rs 1,000 crore for relinquishing the 50% stake in Bharti Walmart Private Limited that runs the 20 cash-and-carry outlet”, an Economic Times report said.

Given policy uncertainty over the 30 percent sourcing norms, the cash-and carry business which comes without any restriction on FDI is the most viable option for Walmart as of now.

“T_he current regulations mean Walmart would need an Indian partner to set up retail operations and, keeping in mind their discussions with other major Indian players, that would take a while. So, going ahead with the 20 stores they have for the cash-and-carry model seems to be the most logical thing to do_,” Devangshu Dutta, chief executive at retail consultancy firm Third Eyesight, was quoted as saying by ET.

In fact, Walmart’s future plans may well be on hold till the 2014 elections are over as it expects further easing on aspects like compulsory sourcing and stake size. It was stringent policy conditions such as mandatory 30 percent sourcing from Indian small and medium enterprises and other clauses like a minimum investment of $100 million in new facilities (50 percent of that in building back-end infra), that played spoilsport in Wal-mart’s India plans.

So any big move should only be expected after the state-wise approval to FDI in retail. Even successive relaxations and clarifications to the rules for FDI in retail have not made it easier for foreign players to enter the market and nowthere are concerns that if the BJP-led government comes to power, it may withdraw the reforms in retail.

India allows 100 percent FDI in cash and carry, but only 51 percent in retail, whichinterferes with the very logic of realising value in organised retail.If Walmartdecides to enter the front-end retail space, Walmart will have to seek a new business partner who will need to have sufficient money to bankroll a highly-competitive, cash-guzzling operationBut as an ET editorial pointed out, “Walmart presumably entered into a joint venture with Bharti with the hope that policy would free it up to structure its business as per business logic. That hope has been dashed,leavingonly mutualinconvenience Exit is the logical option.

For Bharti, the company has already gone ahead and hired Raj Jain, former CEO of Walmart India, as an advisor to the group.

According to a DNA report, Jain will likely build and sustain back-end operations.

Jain, who had joined Walmart in 2006, was named head of Walmart India in 2007. During his tenure, the company set up the wholesale cash-and-carry joint venture with Bharti Enterprises, back-end services and consulting businesses.However, bribery investigation and disclosures had virtually stalled the joint venture’s expansion plans.

As of now, not many are optimistic about Bharti remaining in the retail business for very long.Bharti Airtel has already become financially leveraged after buying a clutch of telecom firms in the developing world including Africa’s Zain. As a result, it has run up a debt of $12 billion. It has been shedding its minority stakes in several non-core businesses in recent months in order to trim its high debt and could do so in the retail business too.

After all, its200 stores are bleeding and the business is a massive cash guzzler. Alow margin, complex retail business minus a global partner will force Bharti to review its strategic fit.