Walmart signs term sheet for buying a majority stake in Flipkart

Walmart has signed a definitive agreement to acquire about 75 percent of online retailer Flipkart and a formal announcement is expected in less than three hours time.

Sources told Moneycontrol that the two companies have signed a term sheet — an agreeement defining the contours of the transaction — today.

Under the deal, Walmart will likely buy 70-75 percent of online retailer Flipkart for about USD 15 billion.

It will also rope in internet search giant Google as a new investor in which the company is expected to invest about USD 1.5 billion for about 7 percent stake.

The deal will likely value Flipkart at USD 20 billion. Walmart will also likely invest USD 2 billion directly by infusing fresh equity in the Bengaluru-based company founded by Sachin Bansal and Binny Bansal (unrelated) in October 2007.

As part of the deal, co-founder and executive chairman Sachin Bansal will likely exit completely, selling his 5.55 percent stake.

Flipkart’s existing shareholders  China’s Tencent Holdings, and US-based Tiger Global Management, will exit partially and retain small stakes.

South Africa-based Naspers Ltd. And Microsoft Corp will also keep small holdings in the new company.

Sources indicated that these investors will likely have the option of selling their stake to the Bentonville-based retailer at a later date at the same valuation at which Walmart bought a majority stake in Flipkart.

SoftBank, which owns 20.8 percent stake in the company will exit completely. The Masayoshi Son-controlled Japanese company will make a neat profit by selling its stake in Flipkart, with its investment of USD 2.5 billion set to fetch about USD 4 billion, a gain of 60 percent.

Tencent Holdings and Tiger Global Management will continue to be represented on the board.

It was not immediately known how much of stake group CEO and co-founder Binny Bansal—will retain. He currently holds 5.25 percent stake in Flipkart.

Flipkart will be listed on Indian stock exchanges in the subsequent years, as a fully-owned Walmart subsidiary, a corporate strategy similar to what it has adopted in Mexico.

Walmart India and Flipkart will continue to maintain distinct brands after the deal.

New investors can pick stake in Flipkart in a fresh round, which could bring down Walmart's holding slightly, even though it will continue to retain a significant majority holding.

Walmart will likely use a mix of fresh debt and cash to finance the deal. After the deal's closure, Flipkart’s financials will be reported as part of Walmart International.

In the fiscal year ended March 31, Flipkart recorded a gross merchandise value (GMV) of USD 7.5 billion, effectively meaning that goods worth USD 7.5 billion were traded through its site involving thousands of sellers and millions of buyers. It recorded net sales of USD 4.6 billion during the year, representing more than 50 percent growth in both cases.

The transaction may make Flipkart co-founders and software geeks-turned-e-commerce entrepreneurs awesomely rich, but left nagging questions on an Indian dream to build a world beater technology company.

The deal, however, raised questions on regulation and nationalism in an election year, with local traders—a core constituency of the ruling Bharatiya Janata Party (BJP)—sparing no punches in opposing the Walmart-Flipkart embrace, arguing that such mega online supermarkets that offer deep discounts will endanger the livelihood of millions of neighbourhood mom-and-pop stores and street vendors.

The Confederation of All India Traders (CAIT), an umbrella association representing millions of traders, has demanded government scrutiny of the Walmart-Flipkart deal, which it says will only encourage predatory pricing.

It wanted the “unholy nexus” to be “scanned and stopped” and wondered why the government was “keeping its eyes and ears shut” despite knowing the “intent and hidden agenda of companies like Walmart”.

This will be the second time when Walmart and Google will join hands to get a toehold into the online retail space dominated by Jeff Bezos-controlled Amazon.

Last year, both the companies had struck a partnership through Walmart products are sold on Google Express, the internet search giant’s online mall. Indian consumers can also look forward to personalised voice shopping of Walmart and Flipkart products by simply speaking out the orders to Google Home devices.

This will be Walmart’s largest acquisition in the e-commerce space. It had acquired Jet.com for USD 3.3 billion in 2016. Last month, Walmart gave up control of its UK grocery chain Asda, merging it with British retailer J Sainsbury Plc. Walmart will retain a 42 percent stake in the combined company.

The decision to cede control of Asda is seen as part of Walmart’s global strategy to focus more attention and resources on faster-expanding markets such as India where consumer spending capacity has been rising significantly.

According to India Brand Equity Foundation, a government-supported research agency, the Indian e-commerce market is expected to reach USD 64 billion by 2020 and USD 200 billion by 2026 from USD 38.5 billion as of 2017.

With growing internet penetration, internet users in India are expected to increase from 481 million as of December 2017 to 829 million by 2021.

This will be Walmart’s second coming of sorts for India’s retail market. In 2013, it pulled out of its wholesale joint venture with Bharti Group.

Walmart’s investment in Bharti had come under a scanner amid allegations that the global retail chain may have entered India’s front-end multi-brand retail business two-and-a-half years before the government actually lifted the ban on foreign investors in the sector.

Bharti Walmart, an equal partnership joint venture between Bharti Group and Walmart, which jointly ran wholesale stores under the `Best Price ModernWholesale’ brand.

Walmart India currently operates 21 B2B Best Price cash-and-carry stores and one fulfilment centre in 19 cities across nine states in India.

The retail giant intends to scale up with plans to create “millions of jobs through supply chains, commercial opportunity and direct employment.”

It also plans to support small businesses and `Make in India’ through direct procurement as well as exports. Walmart will partner `kirana’ (neighbourhood grocery stores) owners and members to help modernize their retail practices and adopt digital payment technologies.

Walmart also intends to scale up its sourcing of Indian merchandise and farm products, which, according to the company could result in an increase of an estimated USD 7 billion in farmer incomes, comparable to a doubling of the incomes of an estimated 6-6.5 million rural households.

The company will also invest in supply chains and cold storage infrastructure, helping reduce food wastage.