Walmart made its takeover of Flipkart official Wednesday announcing that it will pay $16 billion for a 77% stake in the Indian e-commerce giant. The deal is Walmart’s biggest ever, easily surpassing the $10.8 billion it paid two decades ago for Asda.
This deal marks an ambitious bet on e-commerce, and is a serious blow to Amazon, which reportedly had a competing offer on the table.
On the news, Walmart shares dropped as much as 4.3% as the deal will dent the company’s earnings in the current fiscal year by 25 to 30 cents a share if the deal closes by the end of the second quarter.
“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 lead retail analyst, Charlie O’Shea, said in an email, adding that it is indicative of Walmart’s long-standing strategy of shifting resources into greater potential markets and segments when it makes sense to do so.
And it certainly does now.
India’s e-commerce market is on track to experiences explosive growth in the coming decades, so paying-up for a chance to make a big splash in the country is a smart move.
For Walmart, joining forces with Flipkart represents its best shot at winning in India. The regulatory environment in the country has made it difficult for Walmart and other international retailers to break into the market, according to Satish Meena, an analyst with Forrester Research.
Flipkart too boasts a successful track record. Last fiscal year, the company recorded $7.5 billion in gross merchandise volume, which represents a growth of more than 50% over 2016. It has also held-off Amazon and retained its position as the market-share leader in India.
Flipkart may be able to build on that lead with Walmart as a key stakeholder. And for Walmart, this move is an indirect defense against Amazon.
The steep decline in share price on Wednesday was surprising considering there has been buzz about Walmart buying a major stake in Flipkart since at least February.
While some investors may be turned off by the hit to Walmart’s profitability in the next couple of years, the deal with Flipkart is sure to be a game-changer, especially in its war with Amazon. To win, Walmart needs to be aggressive, and buying Flipkart is just that.
Both Amazon and Walmart can afford to play the long game, and Amazon’s investors certainly expect it by now. Walmart’s investors, however, don’t, and it looks like they just gave a great buying opportunity for investors wanting exposure to Flipkart—and India’s retail landscape’s—explosive growth and future potential.