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Deal Dilemma: Walmart-Flipkart’s $16-Bn Alliance Test Begins Now

Author: A Saye Sekhar/Wednesday, May 16, 2018/Categories: Corporate

Deal Dilemma: Walmart-Flipkart’s $16-Bn Alliance Test Begins Now

While the entire country is basking in the afterglow of the deal inked by American retail giant Walmart to pick up 77 per cent of stake in Indian e-commerce bellwether Flipkart, Walmart’s flight seemingly has too many air-pockets to cross before a safe landing.

The first sign of disgust was demoed by co-founder Sachin Bansal who decided to part ways with the company he reared, along with Binny Bansal, for 11 years from selling books to a company valued at USD 20 billion for the Walmart investment.

Sachin is said to have put himself in the ‘cart’ and proceeded to check out by selling his stake of 6 per cent (valued at USD 1 billion) to Walmart, as he had expected but failed to get an assurance over a much bigger role and positioning in the post-acquisition structure, according to a source in Flipkart. He is already the executive chairman of Flipkart.

The peregrination of the deal was apparently on a bumpy road with the Union government’s “reluctance” to the acquisition valued close to Rs 1 lakh crore. The Government of India was cold to entertaining Doug McMillan, president and CEO of Walmart, who, almost a month ago, sought to initiate the process through “proper channel” by involving senior ministers and government officials of the Narendra Modi administration in the biggest ever acquisition in India.

Swadeshi Jagran Manch (SJM), an organization owing allegiance to the Rashtriya Swayamsevak Sangh, and the Confederation of All-India Trade are vehemently opposed to the deal. Ashwani Mahajan, co-convener of SJM had written to Prime Minister Narendra Modi that foreign direct investment (FDI) in multi-brand retail would “kill entrepreneurship” and was “anti-farmer”. He raised doubts over the deal as Walmart did not have a ‘marketplace model’ across the globe and was trying to enter India through the e-commerce route.

Mahajan also spoke to Union commerce minister Suresh Prabhu and tried to prevail upon the latter that the deal was “illegal and was against the interests of the small traders”. The government is likely to “look into the deal”. Small traders are BJP’s solid vote bank. Will BJP allow a green channel entry to Walmart’s ecommerce foray, just before the general elections next year is a 16-billion-dollar question.

The third biggest roadblock in Walmart’s India journey is the “second thoughts” of Japanese investor Softbank on whether to, and if so when to, exit from Flipkart. Softbank holds 22.3 per cent stake in Flipkart. Though Masayoshi Son, the Softbank’s founder-CEO, announced that the Japanese conglomerate decided to exit Flipkart, the tax on short-term capital gains is likely to cause a hurdle.

The exit is happening within two years of making the investment, realizing USD 4 billion to its actual investment of USD 2.5 billion, amounting to an annualized gain of 75 per cent. The exit attracts provisos of short-term capital gains tax, making Softbank cough up USD 600 million out of the USD 1.5 billion it gains from the stake sale. If it has to be avoided, Softbank will have to wait till August 2019.

Softbank announced its investment of USD 2.5 billion in Flipkart Singapore through SVF Holdings (Jersey) LP, Jersey in August 2017. Though Walmart would pay Flipkart Singapore, the latter’s share is derived from assets in the Indian firm. Thus, the exit before 24 months of investment would attract a 40 per cent short-term capital gains tax. As a result, Softbank began talks with Walmart to buy cushion time. Walmart too is apparently keen on continuing with Softbank on board to ensure that the investor doesn’t arm-twist the retail behemoth to cough up more value for the 22.3 per cent at a later date. Instead, Walmart wants to cement the value of 22.3 per cent at USD 4 billion only.

The company’s losses went up to Rs 8,771 crore in FY 2017, though the revenues spiked 29 per cent at Rs 19,854 crore from Rs 15,403 crore a year ago. Losses could be offset to some extent with the valuation increasing to USD 20 billion, for the five-fold rise in finance costs of Rs 4,308 crore due to fall in valuation from USD 15.2 billion in 2015 to USD 11.6 billion in April 2017 when the company raised capital from Chinese internet group Tencent.

The Indian regulators, including the taxman, “welcomed” Walmart for consulting on computing the withholding tax liability for the acquisition.

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