Amazon Wedges Itself In The Acquisition Deal Between Walmart And Flipkart, Offers $2 Bn Breakup Fee

Days after Walmart completed due diligence on Flipkart, global rival Amazon has reportedly offered a breakup fee of around $1 Bn to $2 Bn to the homegrown ecommerce unicorn, thus wedging itself in a deal that could potentially catapult Flipkart’s valuation to over $20 Bn.

A breakup fee, for the uninitiated, is a penalty set in merger or acquisitions agreements, to be offered by the payer (in this case, Amazon) if the deal gets terminated or if one of the parties decides to back out of the deal.

A report by FactorDaily quoted a source as stating, “Amazon is keen on the deal and the breakup fee can be anything north of $1 Bn in a deal where Flipkart is valued at $18 Bn-$20 Bn.”

According to another person in the know,  Amazon is yet to make a formal decision on the matter. The development comes just over a week after reports surfaced that the Jeff Bezos-founded ecommerce behemoth was looking to acquire Flipkart and had already initiated exploratory talks to that end.

If the terms of the breakup fee are accepted by Flipkart and its shareholders, Amazon and the homebred online marketplace will likely file a pre-filing consultancy request with the Competition Commission of India (CCI). Following this, Amazon could officially seek CCI’s approval to acquire a substantial stake in Flipkart.

Shedding light on the development, the source requesting anonymity told FactorDaily, “Amazon has offered to sweeten the deal by agreeing to pay the breakup fee of $2 Bn. Basically, the stakes are high. Amazon is pushing the offer.”

“There will be due diligence for sure, but given the rival sensitivity, it might be limited due diligence, if it goes that far. The breakup fee also means Amazon might ask for an exclusive time period for negotiations,” another person familiar with the development stated.

Email queries sent to Amazon India and Flipkart’s communication teams did not elicit a response till the time of publication.

A Timeline Of Walmart Flipkart Acquisition Talks

Global retail giant Walmart has been eyeing a stake in the Flipkart since 2016. Inc42 had then reported that Flipkart and Walmart were in early talks for an alliance. At the time, Walmart indicated its intentions to acquire a 25% to 51% stake in Flipkart with an investment of $7 Bn.

The investment was to be done through a mix of primary and secondary purchase of shares. As per sources, the $10 Bn-$12 Bn secondary share sale will take place at a discounted valuation. It was also estimated that if the deal goes through, Flipkart’s valuation will rise to $20 Bn from its current valuation of $14.2 Bn.

Recently, in the second week of March, reports surfaced that SoftBank was preparing to sell a part of its share in the company to Walmart. It was earlier speculated that SoftBank wasn’t keen to shed off a part of its 23.6% shareholding in the company.

The Japanese conglomerate invested $2.5 Bn in Flipkart in August 2017, which was a follow-on to the earlier $1.4 Mn fundraise from Microsoft, Tencent and eBay. However, analysts believe that SoftBank is expected to gain almost $2 Bn from its last investment in the company if the Walmart deal goes through.

Other than SoftBank, investors holding substantial stakes in the online marketplace – including New York-based Tiger Global, Accel Partners, Naspers and IDG Ventures – are looking to sell a portion of their shares in Flipkart, people closed to the development revealed.

Back in February 2018, Inc42 also reported that under this proposed investment, there would also be a provision to set up a chain of retail stores across the country. This was speculated to benefit Flipkart as the company had been eyeing offline expansion for quite some time.

At present, Walmart has a strong presence in the country through its B2B arm, which currently boasts a network of 21 Best Price Modern Wholesale stores. Therefore, with the partnership, Flipkart is bound to win on its deposits as well as expand its offline presence in the country.

So, Why Are Amazon And Walmart Warring Over Flipkart?

Founded in 2007 by Sachin Bansal and Binny Bansal, ecommerce giant Flipkart continues to be a favourite of investors, despite numerous fluctuations in valuations. With popular fashion portals Myntra and Jabong, digital payments platform PhonePe and eBay India in its kitty, the online marketplace has raised over $6.1 Bn in funding till date from a bevy of investors.

As of March 2017, Flipkart sold goods worth an average of $8.3 Mn (INR 54.4 Cr) daily, compared to $6.4 Mn (INR 42.20 Cr) worth of goods that were sold every day in the previous year.

During FY17, its cash burn rate dropped as Flipkart managed to cut its losses slightly at the earnings before interest and tax level.

However, although Flipkart remains an attractive choice for investors, Amazon’s sudden interest in acquiring the homegrown ecommerce platform has largely to do with the former’s burgeoning rivalry with Walmart.

Interestingly, both Walmart and its major global rival Amazon had announced their plans to invest over $300 Mn (INR 2,000 Cr) in India in a bid to build their network and to gain a share of the local retail market in January 2016.

Amazon, for instance, has already entered the food retail segment in India. The company started its pilot project in Pune, while also expanding its hyperlocal services arm Amazon Now in February.

Reports suggested that Amazon will now sell locally made and packaged food to the consumers directly and will compete with other leading online grocery and food retail marketplaces like Grofers, Bigbasket, Supr Daily, who received similar approvals from the government for food retailing.

It is also boosting its presence in other verticals in the country with products such as Amazon Pay, Amazon Prime, and Amazon Pantry, among others.

India’s ecommerce industry is expected to touch $200 Bn by 2026, as per a report by Morgan Stanley. The market reached $33 Bn registering a 19.1% growth in 2016-2017, as per Indian government’s Economic Survey 2018.

Amazon, for one, has remained true to its commitment to the Indian market through frequent capital infusions. Its latest interest in acquiring rival Flipkart – and its decision to offer a breakup fee of around $1 Bn to $2 Bn – are likely in line with its aim to emerge as the champion not only in the Indian ecommerce sector but globally.