Mumbai: The Walmart-Flipkart deal, the largest M&A in India by a wide margin, points to a boom in the domestic organised retail industry that is estimated to more than double in four years to about $115 billion by 2020.
Flipkart is expected to make losses until 2020: It has been valued at FY18 EV to gross merchandise value of 2.8 times or FY18 EV to net sales of 4.4 times. As a result, some of the offline retailers could do well in the near term, said analysts.
“This high valuation can have some rub-off impact on other listed offline retail companies that are currently quoting at attractive valuations (when) compared with the Flipkart deal,” said Deepak Jasani, head of retail research at HDFC Securities.
Jasani said the deal points to further retailing alliances locally, potentially influencing sectoral valuations.
“Also, there is an expectation that Walmart will have to tie up with an offline retailer in India because of regulatory constraints, just like Amazon did by buying a stake in Shoppers Stop,” Jasani said. “There are limited players in the offline retail space. So, over the medium term, some of these listed offline retailers could do well in anticipation of such a tie-up.”
Walmart has acquired a 77 per cent stake in Flipkart for $ 16 billion. Although the deal may look expensive on an absolute basis, the valuation is at a discount to that of Avenue Supermarts, and at a significant premium to the valuations of Future Lifestyle Fashions, Future Retail and Shoppers Stop.
SoftBank may Hold Flipkart Stake for 6-12 Months
SoftBank Vision Fund had invested about $2.5 billion in Flipkart in August 2017 and is expected to pocket $4 billion if it sells its stake.
Flipkart, Walmart and Soft-Bank spokespersons declined to comment.
SoftBank is supporting Walmarts acquisition of a controlling stake in Flipkart, said one of the people cited. “This (the deal) happened quickly. Discussions are on with Walmart to help them facilitate the closing of the transaction and determine SoftBanks role in the company going forward,” according to this person.
During the recently concluded negotiations, SoftBank had pushed the Flipkart board to consider a potential merger with Amazon India. SoftBank was in favour of Amazons offer as it wanted to invest additional capital in the combined entity and also potentially buy more shares from existing investors, said a third source.
SoftBank executives are in touch with Walmart CEO Doug McMillon.
“The situation is still very fluid,” said another source familiar with the development. “Soft-Banks fund is registered in Jersey and they are suffering a huge tax liability because there is no DTAA protection with Jersey.”
Signed between India and other countries, a Double Taxation Avoidance Agreement (DTAA) ensures investors dont end up paying taxes on income earned from the source country and also the country of residence.
To avoid the short-term taxation issue, SoftBank may hold the Flipkart stake for 6-12 months, said the source mentioned above.
This may crimp Walmarts plans to acquire a large stake as SoftBank is the single largest shareholder along with Tiger Global Management, whose stake is expected to come down from 20 per cent to 5 per cent after the transaction closes.
It could not be ascertained if SoftBank would eventually opt to keep a part of its stake in the Indian etailer even as Flipkart holds talks to bring in Google owner Alphabet as an investor.
Walmarts buyout of Flipkart is expected to close by the year-end, the US retailer had said in a statement. Other remaining shareholders in Flipkart are cofounder and group CEO Binny Bansal (4-5 per cent), Tiger Global (5 per cent), Tencent (6 per cent) and Microsoft (1 per cent). The remaining stake is held by a few small investors and employees.
SoftBank had invested in Flipkart after a failed attempt to orchestrate a merger with Snapdeal, which was its first bet in the Indian online retail space back in 2014. The Japanese company invested about $900 million in Snapdeal in the hope the etailer would be able to challenge Flipkarts market leadership, but saw the company slip to a distant third behind Amazon India by 2016.
The Flipkart group, which includes fashion portals Myntra and Jabong, has a combined market share of over 39.1 per cent compared with Amazons 31.1 per cent in the Indian online retail space, according to a recent report by Forrester Research.