Walmart Inc.’s (NYSE:WMT) big ticket deal on Wednesday to buy a controlling stake in Flipkart, India's biggest online retailer, is getting a chilly reception on Wall Street.
The big-box retailer will pay around US$16bn to take control of Flipkart, in a deal that puts it head to head with Amazon.com Inc. (NASDAQ:AMZN).
Walmart shares fell 3.9% to US$82.39 in afternoon trading.
The deal gives Walmart an e-commerce foothold in India’s 1.3 billion-person economy at a time when Amazon is also empire building in India. Walmart will take a 77% stake, valuing Flipkart at over US$20bn.
The Flipkart deal, Walmart’s biggest ever, gives the world’s largest brick-and-mortar retailer access to an Indian e-commerce market that Morgan Stanley has estimated will grow to nearly US$200bn in a decade.
However, despite the firepower Flipkart gives Walmart, the homegrown Indian startup is currently unprofitable. Analysts said it will take time for the business to turn profitable and were cautious in their reaction to the deal.
Negative Outlook
Standard & Poor's lowered Walmart’s outlook to Negative from Stable, citing increasing leverage and risks stemming from the company’s spending to expand online and globally as it continues its share buyback program.
The credit firm rates Walmart AA, the third-highest investment grade.
S&P says it sees “leverage increasing about a half turn more” than previously projected for the coming fiscal year.
“Outlook revision is given these weaker credit metric projections and heightened execution risk as Walmart spends heavily to expand its online and global reach while continuing its share buyback program,” S&P write in a statement.
Read: Walmart trounces Amazon in the $15bn battle for Flipkart
Long-term investment
Moody's affirmed Walmart's high-grade bond rating following the Flipkart deal. It viewed the transaction favorably but offered a caveat about how Walmart would have to be patient about growing the business and shouldering Flipkart’s losses.
“It is a transaction which we view favorably as it provides Walmart with immediate scale in the burgeoning Indian e-commerce arena," wrote Moody's Charlie O’Shea in a note to clients.
"As Flipkart is expected to generate meaningful losses for at least the next few years, this is clearly an investment for the future,” he added.
Moody’s said the overall impact on Walmart's credit profile was “relatively benign” as the company had built “some cushion over the past few years,” and it expected the company to follow past practice and utilize share repurchases as the lever when necessary to largely maintain its quantitative profile over the next two to three years.
Deal will shave up to US$0.30 from EPS
Walmart said Flipkart’s losses should decline “in the mid to long term.”
Bloomberg reported that the deal will shave US$0.25 to US$0.30 per share from this year’s earnings, with that “impact doubling the following year.”
“It’s typical of a business like this that, as you scale up, you will have losses. We expect those losses to continue for a little while,” Walmart CFO Brett Biggs told Bloomberg in a phone interview.