It's official. After whispers of the possibility circulated for several weeks, Walmart Inc (NYSE: WMT ) now owns the bulk of India's e-commerce powerhouse Flipkart. Shareholders are none too happy about it, if Wednesday's 3% tumble from Walmart stock is any indication. Indeed, WMT stock has made its way to multi-month lows over the course of the past few weeks in fear that such a deal would materialize.
Are investors right to worry? After all, Flipkart is still bleeding money, and Walmart's overseas track record is inconsistent, at best. Never even mind the fact that the Indian government doesn't exactly make things easy for foreign investors .
The concerns are reasonable. But, the market may be making an unnecessary point of viewing the deal through a pessimistic lens.
Details of the Deal
All told, Walmart will be forking over $16 billion for Flipkart, funded by a combination of existing cash, new debt and newly-issued Walmart stock in exchange for what will become a 77% stake in the company.
Regardless of current and prospective partners, the acquisition is as much about stopping Amazon.com, Inc. (NASDAQ: AMZN ) on at least one front as it is about tapping into what's expected to be a $200 billion e-commerce market in India by 2026 .
And it should at least find some success in that endeavor. Pankaj Jain, a startup and fund advisor , explained:
"Though Walmart isn't a big online player in India, it is a force to be reckoned with for sure. They have strong logistics, supply chains, deep pockets, and are deeply committed to winning the Indian market. Combined with Flipkart, this makes a very strong competitor to Amazon."
As it stands right now, in terms of market share for India's online retailing market, Amazon and Flipkart each enjoy about 31% of the country's e-commerce activity. With just a bit more tinkering, Walmart may well be able to turn Flipkart into the dominant machine Amazon.com is in North America.
It's… Complicated for Walmart Stock Owners
Not all observers, nor many owners of Walmart stock see the scope of the opportunity. What they see is a market that's difficult to do business in.
Case in point: Indian consumers are still hesitant to pre-pay for goods ordered online, with roughly two-thirds of them insisting on paying for goods in cash once they're delivered.
Investors familiar with the market know all too well that rival Amazon isn't actually allowed to hold its own inventory of goods it sells in India. Rather, Amazon can only be the middleman, a la eBay.
Regulators have also blocked Walmart from developing a meaningful brick and mortar presence there. Walmart has only been able to open about twenty cash-and-carry wholesale stores in India that are ultimately aimed at business rather than consumers. Even then, those stores must be operated by partners via joint ventures.
Ownership of Flipkart opens a new door, when most others remained closed, though it remains to be seen if any new regulatory roadblocks will surface in the meantime.
Nervous shareholders are also worried about the cost. Bloomberg Intelligence analyst Jennifer Bartashus noted:
"The deal will create an annualized EPS drag of about 60 cents, largely from operating losses, and adds pressure to the U.S. e-commerce business to reach profitability."
And yet, Walmart argues there are more upsides than it may currently be getting credit for.
One of them is the speed at which Flipkart's business is growing. Another is access to its talent pool. Yet another is the pieces of a puzzle that's yet to be put together.
University of Pennsylvania's Wharton School professor Kartik Hosanagar opined:
"I think Walmart is preparing to build a truly omni-channel business in India. The Flipkart deal will give it access to consumers, a massive logistics network, and the platform on which to launch the omni-channel business."
The shining star of the deal, though, may be Flipkart's digital payments system PhonePe, which serves as a means of making and taking payments outside of Flipkart's ecosystem. Last month, the amount of money transferred via PhonePe was 22% stronger than March's tally. It points to a growing comfort with PhonePe, and the very idea of online shopping itself.
Bottom Line for Walmart Stock
In other words, it only remains to be seen exactly where this is all going. There's as much reason for hope as there is for doubt though.
If current and prospective owners of Walmart stock need something more substantial to aggravate them, they might want to chew on something Minnesota-based Stonebridge Capital Advisors portfolio manager Steven Roorda said, "We will not know for five to 10 years whether this transaction is successful strategically or financially."
A lot can happen in ten years. In the meantime, the stock's weakness in response to the news appears a bit over-the-top. Sometimes, deal-making does work out for the best.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter , at @jbrumley.
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