Walmart Falls After $16 Billion Flipkart Deal

Walmart Inc.’s deal to buy a controlling stake in India’s biggest online seller is meeting skepticism on Wall Street.

Walmart shares dropped as much as 4.2 percent to $82.12 as of 10:28 a.m. in New York — the lowest intraday price since October. The company’s stock was already down 13 percent this year through Tuesday’s close.

S&P lowered Walmart’s outlook to negative from stable, citing increasing leverage and risks stemming from the company’s spending to expand online and globally as it continues its share buyback program. The world’s largest retailer will acquire a 77 percent holding in Flipkart Group for $16 billion. The tie-up values the Indian e-commerce giant at about $20.8 billion and marks a blow against rival Inc. as the battle for e-commerce supremacy goes global.

The deal — Walmart’s biggest ever — gives it greater access to India’s e-commerce market, which Morgan Stanley has estimated will grow to $200 billion in about a decade from about $30 billion today.

“As Flipkart is expected to generate meaningful losses for at least the next few years, this is clearly an investment for the future,” Moody’s analyst Charlie O’Shea wrote in a note.

“It’s typical of a business like this that, as you scale up, you will have losses. We expect those losses to continue for a little while,” Walmart’s Chief Financial Officer Brett Biggs said in a phone interview.

With the Walmart tie-up, Flipkart gets additional capital and expertise to battle Amazon, which has spent billions of dollars to gain customers in India. Online sales in the world’s second-most-populous nation are growing about 35 percent a year, according to data tracker Euromonitor, fueled by a rising middle class and urbanization that present an attractive environment for e-commerce.

“We’ve been looking at this business for some time. India needs no introduction; it’s a fantastically growing market. And it fits right in with our strategy,” Judith McKenna, Walmart’s international chief executive officer, said in a phone interview.

For the U.S. retailer, acquiring a stake in Flipkart enables it to tap into India’s retail market without building stores. Walmart once envisioned operating hundreds of locations across India but it has been unable to open traditional units because of long-standing governmental rules for so-called multi-brand international retailers. Walmart entered India in 2009 through a joint venture with Bharti Enterprises and took full control of that business in 2013. It currently operates 20 wholesale clubs in India that serve small businesses.

The deal is the largest-ever in e-commerce, according to data compiled by Bloomberg.

(Disclosure: This article is adapted from an article which is published in Bloomberg. You may read the full article here)