Fibre2Fashion Magazine June 2018 June 2018 | Page 46

Walmart-Flipkart
Within the first year of the closing of the deal, Walmart was said to be planning to pump in another $3 billion into Flipkart,
founded in 2007 by former Amazon employees Sachin Bansal (left) and Binny Bansal (right). Pic courtesy: Flipkart
Minority investors holding 60 per cent of Flipkart’s (minority) shares “acting together, may require
Flipkart to effect an initial public offering” (IPO) four years after the close of the Walmart-Flipkart
transaction, Walmart said in a May 11 filing with the SEC. The IPO should be done at no less a valuation
than that at which Walmart invested in the Indian e-commerce firm, the filing said.
Not everyone was sold on the deal—shares of Walmart fell 4 per cent on May 9 triggered by a
belief that it had made a terrible decision in acquiring a loss-making company. The drop was driven by
“scepticism about the cost of the deal” as well as the cynicism around whether the deal will really help
Walmart gain ground against arch rival Amazon in India, the Wall Street Journal reported. Almost $10
billion of Walmart’s market capitalisation was said to have been wiped out.
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 programme. Walmart was rated AA, the third-highest investment grade. The negative outlook
shows there’s “about a one-in-three chance” that Walmart’s strategy shift could result in a downgrade
over the next two years, the credit-ratings company said in a statement.
Others do not concur. Rating agency Moody’s in its Credit Outlook report the very next week felt
Walmart’s acquisition was “credit positive” for the US retail giant. Moody’s said it expected the deal to
initially weaken Walmart’s credit metrics, with retained cash flow (RCF) to net debt ratio likely dropping
to the low—30 per cent range from 40 per cent currently and debt to EBITDA (earnings before interest,
tax, depreciation and amortisation) ratio likely to double from 1.6 times currently.
“Despite this deterioration, the acquisition is credit positive because it provides immediate scale in
India’s burgeoning retail e-commerce sector and we expect that a combination of increased cash flow
and debt reduction will push the RCF/net debt ratio back above our 35 per cent. Although we expect
that Flipkart will continue to generate losses for the next few years, our credit-positive view is based on
India’s compelling features, including its 1.2 billion residents and an economy that generates more
than 7 per cent annual GDP growth,” Moody’s said.
The reason for this rating echoed what the same reasoning that Walmart would have had in
acquiring Flipkart: a prospective Indian market. “India is one of the most attractive retail markets in
the world, given its size and growth rate,” Walmart’s president and CEO Doug McMillon had said.
Moody’s agreed: India has more than 400 million millennials, a growing middle-class and exploding
smartphone penetration, all of which are critical as shopping continues to shift online. Following the
announcement, we affirmed Walmart’s Aa2 rating and stable outlook.”
But what is definitely certain is that the retail/etail is up for some action in the days to come.
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