Amazon.com Inc has made a formal offer to buy a 60 percent stake in Indian online retailer Flipkart, as per media reports on 2 May.
The sources that have spoken of this development has also pointed out that Amazon offered Flipkart a breakup fee of $2 billion and is likely to be on par with Walmart Inc’s bid for the e-commerce company.
But is this bid high enough?
Amazon’s bid for a majority stake in Flipkart is not lucrative to some of the biggest investors as well as the top management team of India’s largest online retailer, as the American giant’s offer -made earlier this week – is not high enough to cover the potential risks, according to those close to the development.
Flipkart’s deal with Walmart is almost final and is expected to be completed in the next few weeks.
The deal with Amazon also brings in the possibility of a scrutiny from the Competition Commission of India (CCI) and also the risk of having to share highly competitive data during due diligence.
Softbank, which holds about 20% stake in Flipkart, has been keen on the Bengaluru-based company considering a bid by Amazon. The Amazon proposal involved a share swap between its Indian unit and Flipkart, with Softbank also exploring the option of investing more capital, said another source.
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The other major investors in Flipkart include Tiger Global Management, Accel, Naspers and Tencent, each of these investors has a representative on the board of the company, all of whom are in favour of the Flipkart-Walmart deal. SoftBank is also expected to tow the line.
What do the experts say?
Legal experts are of the view that a Walmart-Flipkart deal will invite lesser questions and complications as compared to an Amazon-Flipkart deal, in particular with respect to the Competition Commission of India.
“If the combined market share of the parties who are competitors exceeds 15%, then they will have to notify the CCI by way of a Form 2 — which requires the parties to furnish very detailed information, data and analysis,”
said Ravisekhar Nair, partner of competition law at ELP.
A Form 2, the process can take anywhere between 3- 12 months depending on the complexity of the transaction and markets impacted by the transaction, Nair pointed out.
However, a Form 1 notification, which is what competing companies file when their combined market share is below 15%, requires an approval process of about three months.
The Walmart-Flipkart deal would be Form 1 and an Amazon-Flipkart deal would be Form 2, experts opine.
A move to buy Flipkart will be the most aggressive acquisition of a rival by Amazon. Previously, it closed a $13.7 billion acquisition of US retailer Whole Foods, giving it an offline footprint in the US; the $1 billion acquisition of Souq helped the American online giant expand in the Middle East. It also closed a $1 billion buyout of doorbell-camera startup Ring for its technology.
Amazon has committed $5 billion to the Indian market and founder Jeff Bezos has said in the past that it is the fastest growing online marketplace in the country. Winning the Indian market has become pivotal for both Amazon and Walmart, the two American companies have not been able to make significant headway in China.
But Flipkart’s deal with Walmart would ensure that the management team will not change, which may not be the case in an Amazon offer.
Media reports claimed that Walmart may get less than the majority of 3-4 seats on Flipkart’s board of 10 directors. The Indian online retailer is expected to continue as an independent company, retaining its top management including founders Sachin Bansal and Binny Bansal and chief executive Kalyan Krishnamurthy.
Flipkart’s investors have already started marking up the valuation of the company in anticipation of the Walmart deal.
The country’s largest e-commerce retailer is tipped in favour of Walmart with high chances of the deal getting finalised in favour Bentonville-Arkansas giant.
However, with the SoftBank CEO, Masayoshi Son, now in India, one might expect some changes in the Flipkart-Walmart deal.
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