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Walmart–Flipkart Megadeal Announced, Stock Falls More than 4%

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Walmart acquires a majority stake in Flipkart

The highly anticipated deal between Walmart (WMT) and India’s leading e-commerce company, Flipkart, is finally here. Walmart announced today that it’s acquiring about a 77% stake in Flipkart for $16 billion, valuing the company at more than $20 billion. Following the announcement, Walmart stock cracked about 4.1% by 10:22 AM GMT as the transaction is expected to be EPS-dilutive and pressure operating margins in fiscal 2019.

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Flipkart co-founder Sachin Bansal, Japan’s SoftBank, and Naspers are to sell their entire stakes in the company to Walmart. Sachin Bansal owned about 5.5% of the business, while SoftBank and Naspers held 20% and 11.2%, respectively. Meanwhile, the remaining 23% of the business is to be held by Flipkart’s co-founder, Binny Bansal, and early investors including Tiger Global Management, Tencent Holdings Limited, and Microsoft (MSFT).

Subject to regulatory approvals, the deal is expected to close by the end of the second quarter this year. Walmart plans to fund the deal through newly issued debt and cash. Meanwhile, given the increased interest expense owing to the investment, Walmart expects its earnings per share to take a hit of $0.25–$0.30 in fiscal 2019.

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Why Flipkart matters to Walmart

India’s e-commerce market offers huge potential, especially given the size of its economy and fast growth rate. Walmart’s president and CEO, Doug McMillon, acknowledged this fact and stated that “India is one of the most attractive markets in the world owing to its size and growth rate.” Per Morgan Stanley, India’s e-commerce market is expected to be around $200 billion by 2026, implying a strong growth proposition.

Currently, India’s e-commerce market is dominated by Flipkart and Amazon (AMZN), with the former leading the industry. Flipkart’s fast-growing platforms, including Myntra and Jabong, have helped the company defend its market share against Amazon and maintain a stellar sales growth rate.

In the fiscal year that ended on March 31, Flipkart posted net sales of $4.6 billion while its GMV (or gross merchandise volume) came in at $7.5 billion, both up more than 50% on a YoY (year-over-year) basis.

Walmart is reshaping its international strategy to drive growth as competition heats up in the domestic market. Besides facing stiff competition from Amazon, Walmart is also taking heat from rivals Target (TGT) and Costco (COST). Target significantly ramped up its e-commerce platform in the past year and is matching services from both Walmart and Amazon, including doorstep delivery, curbside pickup, and value pricing. Costco’s strong membership base and unique value proposition continue to offer tough competition to the Walmart-owned Sam’s Club.

Flipkart’s leading position in fast-growing categories—including fashion and mobile and lucrative e-commerce platforms—are expected to boost Walmart’s prospects in the long run. Plus, beating the combination of Walmart and Flipkart would be an uphill task for Amazon, which has also pledged a significant amount for expansion in India. Walmart is expected to publicly list Flipkart.

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