Walmart has an option to invest an extra $3 billion in e-commerce company Flipkart, according to a regulatory filing by the world’s largest retailer with the U.S. Securities and Exchange Commission.
The Bentonville, Arkansas-based company earlier this week said it had agreed to pay $16 billion for about 77% stake in Flipkart, a deal that will help it to take on its arch rival Amazon in India’s online retail market.
At any time after the closing of the transactions and on or before the first anniversary of the closing, the purchaser, or any of its affiliates, may “request that Flipkart issue additional ordinary shares with an aggregate purchase price of up to $3 billion,” said the SEC filing.
Devangshu Dutta, chief executive of retail consultancy Third Eyesight, said the infusion in itself is a significant measure of confidence that Walmart has, “that Flipkart is something which needs to be supported not only in terms of integrating it into the Walmart business but also as an independent [business],” said Mr. Dutta. “Retail and e-commerce are cash-hungry businesses and for further growth [and return on investment]..., Walmart does need to invest.”
The deal, the biggest ever acquisition for Walmart, had valued Flipkart for more than $20 billion, according to sources. Walmart’s investment included $2 billion of new equity funding to help Flipkart accelerate growth, and $14 billion for buying out existing shareholders.
As per SEC filing, Walmart may take Flipkart public in four years. Minority shareholders holding 60% of Flipkart’s shares “acting together, may require Flipkart to effect an initial public offering following the fourth anniversary of the closing of the transactions,” said the retailer. The IPO should be done at a valuation no less than that paid by Walmart under the share issuance agreement, subject to the satisfaction of other conditions regarding such offering.
‘Largest Internet IPO’
“It would be the largest IPO for an Indian Internet company and among the biggest in the world,” said Anil Kumar, CEO of RedSeer Consulting. Mr. Kumar said for the next four years, Flipkart would definitely need an additional infusion of money for keeping the “momentum going” and executing the plan. He said Walmart was not interested in operating Flipkart like any other investor would have done, such as ‘SoftBank or Tiger Global’. “They [Walmart] are not going to dilute the share for sure,” said Mr. Kumar.
Walmart had earlier said some of the existing shareholders include Flipkart co-founder Binny Bansal, China’s Tencent Holdings Ltd and software maker Microsoft Corp.
The deal which is expected to be completed later this year is subject to various conditions, including, regulatory approval by the Competition Commission of India and the absence of governmental or shareholder litigation challenging either of the transactions.
The Flipkart board will initially have 8 directors, as per the filing. These include five Walmart-appointed directors; two appointed by certain minority shareholders; and one founder. For at least two years following the closing of the transactions, two of the Walmart-appointed directors must be unaffiliated with Walmart. The number of directors may be increased to nine at any time, which additional director would be appointed by Walmart [unaffiliated] with the approval of a majority of the Flipkart directors. Walmart may appoint or replace the chief executive officer and other principal executives of the Flipkart group of companies.
However Walmart president Doug McMillon this week had praised the Flipkart management led by co-founder Binny Bansal and CEO Kalyan Krishnamurthy and had said it would be a business as usual at the firm.
