Walmart Inc. said Wednesday it has agreed to take control of India’s largest e-commerce company, Flipkart Group, for $16 billion, betting that growth in the South Asian market will make up for the short-term losses from taking on the unprofitable online retailer.
Investors sent Walmart’s stock down about 3.5% in midday trading in an indication of skepticism about the cost of the deal and whether it can help the Bentonville, Ark.-based retailer thwart Amazon.com Inc.’s push into India.
Walmart executives cast the largest acquisition in its history as a long-term play in a market with a rising middle class and plenty of room for growth in e-commerce, mobile adoption and retail overall. Only about 15% of India’s 1.3 billion people shop online, according to research firm Gartner.
“If we were looking at this company with say a three to five-year horizon we wouldn’t invest elsewhere” beyond North America, Walmart CEO Doug McMillon said on a call with investors. The purchase is about “setting the company up for growth and profits in the future,” he said.
Once the deal is complete, Walmart will own 77% of Flipkart.
The transaction will reduce Walmart’s per-share earnings by 25 cents to 30 cents for its current fiscal year if the deal is completed in the year’s second quarter, the company said. Walmart’s profit is expected to take a bigger hit of 60 cents a share in the next fiscal year, as the retailer invests to increase Flipkart sales.
Walmart, which had $6.8 billion in cash on hand as of Jan. 31, said it will take on new debt to fund the transaction, but didn’t provide details on financing.
Global retailers have long salivated over the potential purchasing power of Indian consumers, but few have been able to make much money there. Per-capita gross domestic product in India today is about 30% lower than China’s a decade ago. Furthermore, online sales appear to be easing after years of dramatic growth. Online sales in India more than doubled in 2014 and almost tripled in 2015, but were nearly flat in 2016, according to estimates from Credit Suisse.
Some analysts said the cost of the deal makes sense if Flipkart eventually becomes a publicly traded company, as its founders have suggested. That “helps explain the massive amount of money that Walmart paid for it,” said Bryan Gildenberg, an analyst at Kantar Consulting. “As long as e-commerce companies continue to outperform in the market, it is easy to imagine that Flipkart will eventually be valued at much more than $16 billion,” he said.
“It’s got scale, it’s got growth, but it’s also got a great management team,” Judith McKenna, chief executive of Walmart International, said in an interview. “This is about the growth strategy the team has been clear about for some time,” she said. Last week Walmart sold a controlling stake of U.K. chain ASDA to J Sainsbury PLC.
SoftBank Group Corp. founder and CEO Masayoshi Son said at a news conference Wednesday in Tokyo that the company’s $2.5 billion investment in Flipkart would be worth $4 billion after the deal. SoftBank is selling that stake, a person familiar with the matter said. eBay Inc. also said Wednesday it would sell its stake in the firm for around $1.1 billion and end Flipkart’s license to use the eBay brand in India.
Alphabet Inc.’s Google has discussed joining Walmart’s investment in Flipkart, according to people familiar with the talks. “We continue to have discussion with other potential investors, but too early to say” how those will turn out, Ms. McKenna said Wednesday. Walmart’s investment stake could move lower if those deals are completed, the company said in a release.
Walmart said its investment includes $2 billion in new equity funding to help Flipkart grow.
In the fiscal year ended March 31, Flipkart reported sales of $4.6 billion, Walmart said.
Write to Sarah Nassauer at sarah.nassauer@wsj.com and Corinne Abrams at corinne.abrams@wsj.com
