US retail giant Walmart’s $12 billion acquisition of India’s biggest e-commerce firm Flipkart is in the final stages and a deal is likely to be announced in the next few days, according to sources. The contours of the deal, which is expected to see Walmart taking nearly 72-73 percent stake, are being finalised following which approval from both the boards will be taken, sources privy to the development said. They declined to be identified as the matters are still under discussion and are confidential. Separately, Bloomberg reported that board of Flipkart Online Services has approved an agreement to sell about 75 percent of the company to a Walmart-led group for about$ 15 billion.
According to Greyhound Research Chief Analyst and CEO Sanchit Vir Gogia, Walmart adding Flipkart to its kitty will act like a shot-in-the-arm and give it a significant up against ace competition, Amazon.
“Flipkart shareholders also stand to gain a better outcome on their returns (as part of deal with Walmart) and the founders and key management get a bigger stake in the game given higher reliance on them to successfully run and grow the commerce business,” he added.
According to Greyhound Research, Walmart is expected to continue operating its existing Cash & Carry business in India separately and not merge it with the consumer facing e-commerce business of Flipkart.
“We expect Walmart to be in this journey with Flipkart (if the deal does goes through) for the long haul and the one where both parties join hands to bring respective expertise. To give context – Walmart has been sourcing directly from farmers; has great depth in supply chain management warehousing operations – solid pluses for Flipkart,” Greyhound Research Chief Analyst and CEO, Sanchit Vir Gogia said.
A deal that brings Walmart and Flipkart together would lend value to kirana stores in India, said Sanchit Vir Gogia, Chief Analyst, Founder & CEO, Greyhound Research.
“The key will be to use the existing network and infrastructure of kirana stores to better stock and deliver products, a solid differentiation from others in the game,” he said.
Mr. Gogia said any apprehension of Walmart using the acquisition as a back door to establish a retail presence in India was misplaced as the laws of the land were clear.
“We expect Walmart to be in this journey with Flipkart (if the deal goes through) for the long haul.”
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Additional Insights (over and above the sources mentioned above) from Sanchit Vir Gogia of Greyhound Research:
- Per our findings at Greyhound Research, Walmart’s existing Cash & Carry store business in India can be expected to continue as a separate business unit and not mixed with the business and ongoing affairs of it’s ecommerce business.
- It’s critical to note that Walmart or any other entity of its type cannot use acquisitions in India as a backdoor to establishing a retail presence in the country – the laws of the land are clear and we see no reason for a company like Walmart or the like to violate them.
- Having said that, we expect Walmart to be in this journey with Flipkart (if the deal does goes through) for the long haul and the one where both parties join hands to bring respective expertise. To give context – Walmart has been sourcing directly from farmers; has great depth in supply chain management warehousing operations – solid pluses for Flipkart.
- We can also expect this coming together to bring value to kirana stores – the key will be to use the existing network and infrastructure of kirana stores to better stock and deliver products – a solid differentiation from others in the game.
- Separately, per our estimates, the deal is expected to be in the range of USD 12-14 Bn with a equity of 70-73%.
- Lastly, the involvement Alphabet (if they do agree to participate) will bring solid expertise and people networks needed to make Flipkart a true global phenomenon and make it a backbone for Walmart’s success in the global ecommerce market.
- At Greyhound Research we are of the view that Walmart is more of a logistics and a supply chain company than being a retailer. At the core of their operations, Walmart has achieved excellence when it comes to moving and managing physical goods across the globe in as many efficient ways as possible.
- With the proposed acquisition of Flipkart, the company will be able to extend this expertise to managing physical goods in the digital world – a strength that Flipkart seriously lacks. To put this in context – supply chain is also the strength of Amazon, Flipkart’s ace competition. This strength, we at Greyhound Research believe, is a significant differentiator in a marketplace dominated by thin margins and worsened by steep discounting policies.
- What must be noted is that Walmart also brings to the table a deep and solid understanding of using network of existing retail infrastructure and adding technology to it to offer real-time status on stocks – again, this will come handy for Flipkart in it’s journey of onboarding existing kirana stores as its feet on the street to stock and supply products.
- Given this strength, we can well expect significant portion of the proposed investment by Walmart – in-tune of USD 12-15 Bn per Greyhound Research estimates – to be directed towards adding supply chain strengths to Flipkart. This, we believe, will act as a key differentiator against Amazon who is increasingly adding muscle to it’s India business.
- In essence, if Walmart is compared to a car, while the steering is it’s retail presence, the real engine and the chassis is its supply chain and logistics functions.
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Analyst:
Sanchit Vir Gogia: Sanchit is the Chief Analyst, Founder & CEO of Greyhound Research, an award-winning global research & advisory firm. To read more about him, click here.