Walmart Down On Acquiring India’s Flipkart For $16 Billion

Walmart Down On Acquiring India’s Flipkart For $16 Billion

 
Retail giant Walmart Inc. (NYSE: WMT) acquired a 77% stake in India’s ecommerce firm Flipkart for a sum of $16 billion. Reports have emerged that Walmart is planning to invest an additional $3 billion, raising its stake to 85%. The acquisition was based on a valuation of $20 billion for Flipkart, which commands 34% of India’s online ecommerce market. India’s ecommerce business is growing in leaps and bounds. However, the market has reacted negatively to the news. As discussed below, the fight for market share has just begun in India and it will be a long drawn battle. Therefore, we are expecting the stock of Walmart to remain bearish in the short-term. The stock of Walmart closed at $84.39 on Monday.

With this acquisition, Walmart will now be competing directly with its bitter enemy Amazon, which has committed $5 billion for its expansion plans in India. Walmart has been trying to enter India for several years as of now, without any success. It is currently confined to a ‘cash-and-carry’ wholesale business, which is heavily restricted by the government in order to protect small retailers. As of now, Walmart operates 21 wholesale stores in India and is planning to open another 50 more stores by 2020.

To focus on markets, which are growing at a rapid pace, Walmart has entered into an agreement to sell its British subsidiary Asda Group Ltd. to Sainsbury PLC. Walmart, which generated cash of £3 billion from liquidation, however, will continue to hold a stake of 42% in Asda.

In an attempt to globalise its business, Walmart has acquired a flurry of ecommerce companies across the world. This includes Jet.com,  Shoebuy, and Bonobos. The retailer is struggling to make a mark in China and Japan. However, the company is confident of succeeding in India, with the acquisition of Flipkart, which was founded as an online bookstore by the former employees of Amazon.

Mark Astrachan, an analyst at Stifel, has pointed out that Flipkart has lost a market share of 4% between 2012 and 2017, while Amazon’s share has increased 17% to 27% in the same period.

Stifel expects the acquisition deal to be dilutive by about 6%  in fiscal 2019 earnings per share and about 11% dilutive in the fiscal year 2020. The operating loss of Flipkart is expected to be $1.70 billion. The FactSet estimate for FY19 and FY20 is $4.90 and $5.18, respectively. Finally, the success in India is largely dependent on the rise of e-commerce penetration, which is currently at 2%. As the company’s performance will be negatively affected by the acquisition in the short-term, fundamentals favour a decline in the stock of Walmart.

The price chart indicates the stock of Amazon has broken the support at 85. The next major support is only at 77. Furthermore, the momentum indicator moves below the reading of 100. Therefore, a continuation of the current downtrend is expected.

Walmart - Technical Analysis - 15th May 2018

We wish to gain from the downtrend by investing in a put option contract, which does not expire before May 23rd. Furthermore, we prefer the stock of Walmart to trade at about $84 in the NYSE.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


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