Walmart shares plunge on news of big investment in India

Walmart Inc will pay $16 billion for a roughly 77 per cent stake in Indian e-commerce firm Flipkart, the US retailer’s largest-ever deal, in an attempt to compete with rival Amazon.com Inc in a key growth market.

In a separate deal, already announced but awaiting USA regulatory approval, SoftBank plans to give up some of its stake in US wireless company Sprint, under a $26.5 billion merger deal that will combine it with T-Mobile.

Walmart had been negotiating with the Indian firm for the last two years amid stiff competition from Amazon till the last moment.

Walmart’s investors reacted negatively to news of the retail giant’s Flipkart buyout on Wednesday, wiping away $10 billion worth of Walmart’s market capitalization, as investors punished the stock in early morning trading on the New York Stock Exchange (NYSE).

Sachin and Binny Bansal, both former Amazon.com Inc employees, founded Flipkart in 2007, and like their USA rival, began by selling books. “It will be a major attemt to bring fresh food in the supply chain as it is in the dna of Walmart”, Gurcharan Das said, recounting the impact of Walmart’s entry in China and the Philippines.

It’s official. Walmart acquires Flipkart to enjoy a lion’s share of e-commerce industry in India. Earlier on Wednesday, Soft- Bank chief executive officer Masayoshi Son unexpectedly spilled the beans on the deal by confirming on a conference call that Walmart had made a decision to purchase Flipkart, ahead of the highly-anticipated official announcement.

S&P lowered Walmart’s outlook to negative from stable, citing increasing leverage and risks stemming from the company’s spending to expand online and globally as it continues its share buyback programme. “We believe there is huge growth potential for e-commerce in India and significant opportunity for multiple players to succeed in India’s diverse, domestic market”, added the company’s statement.

Both sources said that Flipkart Group Chief Executive Binny Bansal held a closed-door meeting with the firm’s top leadership at its Bengaluru headquarters on Monday, and one added that Bansal said that Flipkart co-founder Sachin Bansal would exit after the Walmart deal is sealed. The Indian firm has also fought off an onslaught by USA e-commerce giant Amazon.

Walmart executives said they were particularly interested in PhonePe, Flipkart’s mobile payments app, along with its fashion sites Myntra and Jabong.

Venture capitalists have pumped billions of dollars into Flipkart over the past few years but the company is still posting massive losses. Flipkart will maintain a separate brand and operating structure, the companies said.

Walmart does have operations in 19 cities across nine states in the country; Walmart India operates 21 Best Price cash-and-carry stores and one fulfillment center, with more than 95% local sourcing. Son said the sale to Walmart valued SoftBank’s stake at $4 billion – implying a bumper return of 60%.

The investment will give the American retailer a direct link to a market which is expected to be value $20.8 billion when the deal closes.

However, some quarters in India have expressed concerns over the proposed deal.

Walmart’s business in India was previously focused on small businesses. That’s a fraction of Walmart’s latest annual revenue of $485.8 billion. The discontent was so much so that a Rashtriya Swayamsevak Sangh (RSS) affiliate – Swadeshi Jagran Manch (SJM) – has sought Prime Minister Narendra Modi’s intervention into the matter.

“This will further eliminate small and medium businesses, small shops, and opportunity to create more jobs. Great spirit of enterprise”, he said.

On the other hand, Retailers Association of India while staying away from commenting directly on the acquisition, said some e-commerce companies in India have been flouting FDI policy for marketplaces.