MUMBAI/NEW YORK (Reuters) – Walmart Inc (WMT.N) will pay $16 billion for a roughly 77 percent stake in Indian e-commerce firm Flipkart, the U.S. retailer’s largest-ever deal, in an attempt to compete with rival Amazon.com Inc (AMZN.O) in a key growth market.
Shares of Walmart fell 4 percent in early trade as the company warned the deal would dent earnings. It expects the transaction to hurt fiscal 2019 earnings per share by 25 cents to 30 cents if the deal closes before the end of the second quarter.
“We will not know for 5-10 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 opens a new front in Walmart’s 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 and only operates 21 cash-and-carry wholesale stores in the country that sell to businesses.
The purchase is about “setting the company up for growth and profits in the future,” Walmart Chief Executive Doug McMillon said on a call with investors.
Walmart said Flipkart’s logistics, payments and apparel businesses offer new areas of growth.
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.
FOCUS ON INTERNATIONAL BUSINESS
The acquisition underscores Walmart’s renewed focus on fixing its international business and catching up with competitors in key markets. It follows Walmart’s decision to retreat from Britain by selling a controlling stake in its British arm ASDA to J Sainsbury Plc (SBRY.L).
Walmart is also trying to offload a majority stake in its Brazilian operations to private equity firm Advent International.
Walmart said it plans to fund the deal through a combination of newly-issued debt and cash on hand.
Its investment will include $2 billion of new equity funding and the company said it remains in talks with other potential investors to join the funding round. (GRAPHIC-Walmart’s top 5 acquisitions: reut.rs/2rvc15j)
A new investor could lower Walmart’s stake, but the company plans to continue to retain majority control of Flipkart. Reuters previously reported Google-parent Alphabet (GOOGL.O) may buy a roughly 15-percent stake in Flipkart for $3 billion.
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 (MSFT.O), the company said.
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. (GRAPHIC-Top five M&A deals targeting Indian companies: reut.rs/2rwfZKI)
Reuters had previously reported that Bansal and SoftBank would sell their entire stakes 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 Indian retail.
Additional reporting by Sam Nussey, Abhirup Roy, Nivedita Bhattacharjee, Siddharth Cavale, Swati Bhat and Devidutta Tripathy; Editing by Euan Rocha, Bernard Orr and Nick Zieminski