Walmart (NYSE:WMT) has agreed to purchase a 77% stake in India's leading e-commerce company, Flipkart, for $16 billion. Walmart is buying out shares from existing investors, but several key companies are keeping their stakes, including Tencent (NASDAQOTH:TCEHY) and Microsoft.
Amazon (NASDAQ:AMZN) -- the No. 2 e-commerce company in India -- was also reportedly interested in buying a majority stake in Flipkart, but the Indian company feared regulators wouldn't approve such a deal. Walmart, by comparison, has an extremely small presence in India -- 21 stores.
Walmart's acquisition of Flipkart is the latest and biggest in a spree of e-commerce acquisitions the company has made since it acquired Jet.com in 2016. And while Jet.com and its former CEO Marc Lore have fueled great growth in Walmart's online sales, Flipkart could end up being more important long term. Here are three reasons why.
There's a lot at stake
The $16 billion Walmart is putting up for its majority stake in Flipkart makes it the company's largest acquisition ever. It's nearly five times as much as Walmart paid for all of Jet.com -- $3.3 billion -- and it's much more than the company has spent over the previous two years on all of its e-commerce acquisitions combined.
In other words, Walmart has a lot riding on the continued growth of Flipkart and its ability to eventually turn a profit.
In the near term, Walmart expects to take a $0.25 to $0.30 hit on its earnings per share (EPS) for fiscal 2018, assuming the deal closes by the end of the quarter. Next year, it expects to double that loss per share to about $0.60. So, not only is Walmart investing money upfront to acquire Flipkart, it will continue investing billions in the company as it turns a loss for the foreseeable future.
If Walmart is unable to help Flipkart grow its market share and fend off Amazon, it could have overpaid for its largest acquisition in company history.
A massive opportunity
Flipkart is the leading player in one of the largest and fastest-growing markets in the world. E-commerce in India is estimated to reach $200 billion in 2026, according to analysts at Morgan Stanley. That's up from an estimated $38.5 billion in 2017.
It's no wonder Amazon is investing aggressively to take share from Flipkart and fend off smaller competitors. Amazon is opening dozens of fulfillment and delivery stations throughout India. It's selling its Prime memberships at a ridiculously low price (making it the fastest-growing market for Prime ever). And it's gaining ground on Flipkart.
Flipkart grew its gross merchandise volume 43% year over year in the six-month period ending in September 2017. That's faster than the overall industry, but still slower than Amazon's growth, which came in at 67% for the same period.
Even as Amazon outpaces Flipkart, the market holds a massive opportunity for growth, and Flipkart has shown continued strength outpacing the overall market despite being the market leader.
"A key center of learning"
Walmart CEO Doug McMillon said, "India will now become a key center of learning" during the conference call with analysts following the acquisition announcement.
Walmart COO Judith McKenna pointed to Flipkart's research in artificial intelligence, use of data across its platforms, logistics network, and burgeoning mobile payments service, PhonePe, as its key strengths. Walmart could glean operational insight from those efforts and leverage them for growth in international markets, including the U.S.
The Flipkart deal will also partner Walmart with Tencent and Microsoft, which could lend their technological expertise to e-commerce. Tencent already has a strong position in mobile payments in China with WeChat Pay, which has over 600 million users. Walmart and Flipkart are also in talks "with additional potential investors who may join the round," according to Walmart's press release.
Walmart seemingly wants to make Flipkart and India the place where it experiments with technology and e-commerce, and then apply what it learns to its global operations. That could very well be the most important part of this acquisition for Walmart.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Tencent Holdings. The Motley Fool has a disclosure policy.