By Nandita Bose and Sankalp Phartiyal
NEW YORK/MUMBAI (Reuters) - Walmart Inc
Shares of the U.S. retailer fell 3 percent. The company warned it expects the deal to shave fiscal 2019 earnings by 25-30 cents per share if it closes in the second quarter. It also expects Indian investments to shave 60 cents per share from earnings in fiscal 2020.
For Walmart, the acquisition opens a new front in its battle with Amazon, which had expressed interest in making a competing offer for a stake. Amazon now holds about 27 percent of India's burgeoning e-commerce market, according to Euromonitor, where Walmart only operates 21 cash-and-carry wholesale stores in the country that sell to businesses.
"We will not know for five to 10 years whether this transaction is successful strategically or financially," said Steven Roorda, portfolio manager with Minnesota-based Stonebridge Capital Advisors. "Walmart has a very poor track record operating outside North America," he said.
The deal probably will not do much to change market share between Flipkart and Amazon in India, said Jason Benowitz, senior portfolio manager at the Roosevelt Investment Group. In the fiscal year ended March 31, Flipkart reported sales of $4.6 billion.
Sources had told Reuters they thought Amazon's approach to Flipkart was likely a ploy to complicate Walmart's bid.
"It would have been out of character for Amazon to write a check of that size to consolidate its market share in India, where it is already growing at a fast clip," Benowitz said.
A source familiar with the matter said Amazon's interest did not surprise Walmart and was expected. The source also said Amazon's offer did not drive up the deal value.
"Amazon had nothing to do with the multiple. This price is where the discussions began."
Flipkart sells consumer goods ranging from soaps to smartphones and clothes, and gives Walmart access to an e-commerce market that could be worth $200 billion a year within a decade, according to Morgan Stanley.
Walmart expects the deal will play a part in "setting the company up for growth and profits in the future," Chief Executive Officer Doug McMillon said on a call with investors. McMillon has led Walmart's efforts to boost international business.
Walmart said Flipkart's logistics, payments and apparel businesses offer new areas of growth.
"It is not so much about succeeding in India for Walmart because that may or may not happen," said Neil Stern, senior partner at retail consultancy McMillan Doolittle. "It is really about grabbing an opportunity after waiting on the sidelines in a growth market for over a decade," he said.
Walmart initially entered the Indian market in 2007 through a joint venture with a local company, years before Amazon debuted there. That joint venture was called off in 2013 and its presence in India has remained largely static since then, at least in part due to restrictions around foreign investment in physical retail in the country.
FOCUS ON INTERNATIONAL BUSINESS
Walmart has renewed its focus on catching up with rivals in key international markets.
The company retreated from Britain, selling a controlling stake in its British arm ASDA to J Sainsbury Plc
The retailer's international business contributed less than a quarter to its total revenue of $500 billion in fiscal 2018.
S&P Global downgraded its credit rating outlook for Walmart to "negative" from "stable," citing risk from the large investments the retailer is making to fix its global operations and its ongoing technology investments in the United States.
Walmart said it plans to fund the India deal through a combination of newly-issued debt and cash on hand. The investment will include $2 billion of new equity funding and Walmart said it remains in talks with other potential investors to join the funding round.
A new investor could lower Walmart's stake, but the company plans to retain majority control of Flipkart. Reuters previously reported Google-parent Alphabet
The remainder will be held by existing shareholders, including Flipkart co-founder Binny Bansal, China's Tencent Holdings Ltd <0700.HK>, Tiger Global Management and Microsoft Corp
The Walmart statement made no reference to the exit of Flipkart co-founder Sachin Bansal or SoftBank Group <9984.T>, which was one of the largest investors in Flipkart through its Vision Fund.
Reuters had previously reported that Bansal and SoftBank would sell their entire stakes in Flipkart.
Other investors like Naspers and eBay said they sold their holdings in Flipkart.
"The deal reaffirms that there is big opportunity in Indian retail," said Arvind Singhal, Managing Director of retail consultancy Technopak, adding it would attract more global investment into the sector.
(Additional reporting by Harry Brumpton and Melissa Fares in New York, Siddharth Cavale, Nivedita Bhattacharjee and Abhirup Roy in Bengaluru, Swati Bhat and Devidutta Tripathy in Mumbai and Sam Nussey in Tokyo; Editing by Euan Rocha, Bernard Orr and Nick Zieminski)
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Updated Date: May 10, 2018 02:05 AM