Walmart Takes Control of India’s Flipkart in E-Commerce Gamble

MUMBAI — Walmart said on Wednesday it reached a $16 billion deal to buy a majority stake in Flipkart, India’s leading e-commerce platform, in a sizable bet on a vibrant but risky new market.

The deal, struck 19 months after talks began, will plunge America’s largest operator of physical retail stores into direct competition with Amazon. While Flipkart is currently the market leader, Amazon’s relatively new India site is quickly closing the gap.

Walmart announced that it would buy an initial stake of 77 percent in Flipkart and invest $2 billion in fresh capital into the Indian firm. The two companies said they are in continuing talks with other investors to purchase a stake, which might reduce Walmart’s eventual shareholding in Flipkart.

The transaction — the worst-kept secret in Indian business — is a milestone for India’s internet industry. Although a handful of internet start-ups have achieved multibillion-dollar valuations on paper, this is the first time than any of them have cashed out in a big way.

The benefits to Walmart are less certain. Although India’s population is rapidly coming online, the number of people with enough income to shop online is still tiny. In announcing the deal, Walmart warned its shareholders that the purchase would reduce its net income by at least $750 million this year and by more than double that amount next year.

Walmart’s strength has always been its physical stores. It has repeatedly stumbled in its e-commerce efforts in the United States, even as Amazon has become a juggernaut responsible for nearly half of that country’s online sales.

Flipkart, a pioneer in services like accepting cash on delivery for online purchases, has faced its own challenges. Amazon’s entry into India in 2013, backed by more than $5.5 billion in capital from the parent company, pummeled Flipkart with fast delivery, low prices and extra features such as Prime video streaming.

Indeed, when Walmart first began discussions to invest in Flipkart, the Indian company was desperate for capital and willing to sell shares at a much lower price. Now, Walmart is paying a hefty premium to buy its way into the pole position in India’s e-commerce market, but it has not yet outlined any strategy that would keep it ahead of Amazon there.

Walmart also operates 21 wholesale stores in India that sell discounted goods to the mom-and-pop shops that dominate the retail landscape. Regulations prevent the company from opening retail stores in India like it has in the United States, but Walmart may expand its wholesale operations to ease government concerns that it wants to put the small stores out of business.

Flipkart’s investors and many of its employees will reap huge profits from the deal with Wal-Mart. Flipkart’s co-founder, Sachin Bansal, is selling his entire 5.5 percent stake in the company, becoming an instant billionaire. Other early investors like Tiger Global and Accel will also be well rewarded for their early support.

Even the SoftBank Vision Fund, the investment vehicle run by Japanese billionaire Masayoshi Son, will book a tidy gain despite its short time as an investor. It invested $2.5 billion in Flipkart in August, and Mr. Son told investors Wednesday that the stake will now be sold for about $4 billion.

News Source: www.nytimes.com