Why Amazon’s Flipkart bid is just not high enough

Amazon’s bid for a majority stake in Flipkart will cut no ice with 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 said two people aware of the details.
Flipkart is in the final stage of negotiations with Walmart, the world’s biggest retailer, which is looking to buy a significant holding in the Bengaluru-based company.
 
Apart from possible scrutiny from the Competition Commission of India (CCI), a bid from Amazon also comes with risk of having to share highly competitive data during due diligence, the people cited above told ET. Moreover, a long –drawn process could also create uncertainty among employees and vendors of Flipkart, the sources said.
 
Amazon has offered Flipkart a slightly higher valuation than the $18-20 billion valuation offered by Walmart, in addition the ecommerce giant’s bid also comes with a break-up fee of $1.5-2 billion, said one person. The Amazon bid, the person said, is pegged at about $22-23 billion. This could not be independently confirmed by ET.
 
“The Flipkart board is considering the Amazon bid but it does not cover the operating risk involved in pursuing such a transaction,” said this source.
 
At the same time talks with Walmart have progressed to final stages, with a deal expected to be completed in the next few weeks.
 
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 a second source.
 
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 Walmart deal. Softbank is also likely to go along with the other investors, the sources told ET.
 
"We don't offer comments on rumours and speculations," said an Amazon spokeswoman while Flipkart did not reply to queries at the time of filing this article.
 
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.
 
The Flipkart Group, which includes fashion portals Myntra and Jabong, have a combined market share of over 39.1% as compared to Amazon’s 31.1% in the Indian online retail market according to a recent report by Forrester Research.
 
“Typically, a Form 2, process can take anywhere between 3- 12 months depending on the complexity of the transaction and markets impacted by the transaction,” Nair said.
 
In contrast, 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, according to legal experts.
 
Amazon’s due diligence process is only expected to start if Flipkart’s board agrees on the offer. A move to buy Flipkart will be the most aggressive acquisition of a rival by Amazon. It earlier closes a $13.7 billion acquisition of US retailer Whole Foods, giving it an offline foot-print in the US; the $1 billion acquisition of Souq helped the American online giant expand in 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 India market has become pivotal for both Amazon and Walmart, the two American companies have not been able to make significant headway in China.
 
The other factor which may tip the deal in favour of Walmart is that the management team will not change, which may not be the case in an Amazon offer, said one of the sources mentioned above.
 
ET reported on April 30 that Walmart may get less than majority with 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 investore have already started marking up the valuation of the company in anticipation of the Walmart deal. In recent US SEC filings, Valic and Vanguard have marked their Flipkart shares at varying prices valuing the company between $15-19 billion. While Valic marked the shares at $87.6 apiece (for its series ‘A’ investment) and $118.3 (for its series ‘G’), Vanguard World Fund marked them at $119.7 (Series ‘G’) and $142.2 (Series ‘H’).
 
Flipkart leads in fashion and smartphones, Amazon has taken lead in categories such as appliances, consumer electronics, and more importantly, groceries, which builds platform stickiness, the Forrester report stated.
 
Overall, the Indian online retail sector saw sales worth $19.6 billion in 2017 ($20.3 billion including movie and event tickets), as per Forrester, which is expected to grow to $27 billion in 2018.
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