Walmart to pay $16 billion for 77% of Flipkart: US retailer expected to jump in the driver's seat in 18 months
Once the deal closes, Flipkart will be able to invest without having to worry about the purse strings.
Walmart has inked a deal to acquire Flipkart. The transaction will see the US retail giant assume control of the Indian e-commerce major. Bentonville, Arkansas-based Walmart said it will pay some $16 billion for an initial stake of approximately 77 percent in Bengaluru-headquartered Flipkart.
The deal has evinced interest from all quarters – investors, e-commerce players and also those who have been opposing the deal, stating that it will sound the death knell of smaller players who sell online and offline. Be that as it may, the deal, which caps some two years of negotiation, has valued Flipkart at roughly $20 billion. In rupee terms, that works out to around Rs 1.35 lakh crore at the current exchange rate. By comparison, HCL Technologies has a market capitalisation of Rs 1.28 lakh crore, Wipro has a market cap of Rs 1.23 lakh crore, Mahindra and Mahindra (M&M) Rs 1.07 lakh crore and Tata Motors Rs 1.05 lakh crore.
But the deal speaks glowingly of Indian entrepreneurship. Of co-founders Sachin Bansal and Binny Bansal's leap of faith, when they decided to roll out a platform that would sell books, and then expanded the site into what it is today, thereby attracting buyer-interest from both Walmart and Amazon.
The Bansals, who are not related, met in 2005 at the Indian Institute of Technology, Delhi and went to work at Amazon. They were emboldened to copy the model and quit their jobs to start Flipkart in 2007. Sachin and Binny Bansal's entrepreneurial skills helped attract "an investor like SoftBank, in 2017, and helped the duo raise a whopping $2.5 billion from the $100 billion Vision Fund,” Arvind Singhal, CMD, Teknopak Advisors, told Firstpost. The Bansals described that deal as ‘monumental’, which it certainly was – the biggest private investment in the country’s consumer technology sector.
Binny Bansal had tweeted about it and called the partnership 'long-term' then.
— binnybansal (@binnybansal) August 10, 2017
The Bansals were able to do what they did by being at the right place, at the right time, said Sanchit Gogia, CEO, Greyhound Research, who added that the duo should be credited for Indianising a model that was doing well in the US. “What the Bansals did was to Indianise and localise, and in turn, build a home-grown giant,” he added.
Sector analysts remarked that, like the Bansals, several IIT graduates are spoken about in the startup circles, but most haven’t been able to make it big. They said that timing is everything.
Walmart's investment in Flipkart, they said, is reflective of the maturity of the Indian e-commerce system. That apart, it also goes to show that public offerings are not the only form of exits.
"Subject to regulatory approval in India, Walmart will pay $16 billion (Rs 1,07,662 crore) for 77 percent equity stake in Flipkart," the Arkansas-based firm said in a statement. When the deal closes, the immediate advantage for Flipkart will be that it doesn't have to worry about raising funds for a while. Like Amazon, Flipkart will be able to invest without having to worry about the purse strings. “Walmart will take care of the funds for now,” said Paula Mariwala, Partner, Seedfund and co-founder, Stanford Angels.
With more money in the kitty, Flipkart can match Amazon. However, there is a catch. Walmart has had to restrict its exposure in Europe to increase it footprint in India. That will put pressure on the company, said Satish Meena, senior forecast analyst at Forrester. “Walmart will want to maintain a lead in the e-commerce sector in India, and not just that, also grow the market,” Meena added.
While Amazon could be impacted, one should not discount the impact on Paytm Mall and its key investor Alibaba, pointed out Gogia. China's Alibaba has been on an acquisition spree and recently took control of Ele.me, marking its foray into logistics and brick-and-mortar assets. It has also acquired Rocket Internet’s online retail firm Daraz. “These acquisitions show [Alibaba's] laser-sharp focus on building assets and capabilities to put up a serious fight against Walmart and Amazon,” he said.
Customer is king
Competition will benefit the consumer. Discounts will remain the name of the game as each player will have to go all out to retain customers, acquire new ones and provide incentives in a bid to garner customer loyalty. Customers will have a larger palette to choose from for Walmart will bring its global sellers to its Indian e-commerce platform.
"If anything, the deal will compel Amazon, Aditya Birla Retail, Reliance Retail, Future Group and others to up their game. Amazon isn't battling a local player anymore. It will be dealing with a global player now,” Singhal said.
Going forward, the e-commerce game in India will be dominated by three players. Walmart (including Flipkart), Amazon and Alibaba (read Paytm Mall) will be the big three, said Gogia. “We can expect further consolidation and acquisition of specialised e-commerce companies that will help the three boost market share in newer segments,” he added. What can be expected is some acquisitions in the logistics space, for starters, said Mariwala.
Relatively smaller firms and the trader-community are complaining. Traders' lobby Confederation of All India Traders (CAIT) has demanded a scrutiny of the deal, claiming that it will promote loss funding and predatory pricing in the e-commerce sector. CAIT, in a statement, said its "really unfortunate that in spite of having a clear FDI policy, foreign companies are finding an escape route, whether it is in retail or e-commerce." Earlier, CAIT had also argued for the deal to be not allowed to go through until the government floats a regulatory authority for the e-commerce sector.
But the proposed Walmart-Flipkart deal goes to show that despite the government’s FDI policy, Flipkart has emerged as an entity that can attract a lot of interest from its peers abroad. "This alone should be a wake-up call for the government, to examine its policy, because the e-commerce model can make billionaires of many Indian entrepreneurs."
Back in Bengaluru
Meanwhile, in Bengaluru, Sachin Bansal will sell his entire 5.5 percent stake to Walmart. Analysts said Binny Bansal may continue for a year or two, while CEO Kalyan Krishnamurthy will be retained until Walmart can find its 'own person' to run the show.
One expert said on condition of anonymity that Walmart won't meddle with the day-to-day running of Flipkart for three business quarters. A second expert said Walmart will take the wheel 18 months from now.
Clearly, Walmart wouldn't want to upset the status quo. Also, they are not experts in the online retail space and they do not have a 'Prime' like platform, Meena said. For now, "Amazon still has the advantage online, and it benefits from the brownie points earned for good customer service," he added.
Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.
Amazon, which cannot itself acquire Future, tries to block the Future-Reliance transaction, putting livelihoods, lenders and vendors at risk.
Amazon may be on the wrong side of India’s FDI rulebook for multi-brand retail on dispute with Future Retail
By persona, as well as operations, Amazon is an e-commerce entity. Rules disallow FDI investors in multi-brand retail to engage in e-commerce activity.
Amazon seeks control of Future Group's assets worth Rs 30,000 crore through investment of Rs 1,431 crore
Amazon's investment exposure is limited to Rs 1,431 crore in Future Coupons Ltd (FCL) alone. It would be noteworthy to note that Future Group's assets are worth in excess of Rs 30,000 crore