In one of the largest e-commerce deal in the world Walmart Inc (
WMT Quick Quote WMT - Free Report) has picked up 77% stake in the largest online retailer in India Flipkart. This includes an investment of $2 billion as Walmart is looking to take on Amazon AMZN in the Indian market. Flipkart has been valued at $22 billion. The US market responded negatively to this news as Walmart shares dropped by 4% on May 9 and its market capitalization stood at $242 billion. (read: Wal-Mart ETFs to Buy on Blockbuster Q3 Results) Walmart Flipkart Deal: A Brief Synopsis
In financing the investment, Walmart is looking to use a mix of debt and cash on hand. Initially there will be $2 billion equity funding. When the acquisition is completed, Flipkart’s financials will be recorded as per the rules of the Walmart International Business segment. If the deal is closed in the second quarter of the year, Walmart expects
FY19 EPS to go down by 25-30cents. In the mid-term quarter, the company observed that availing tax benefits would be difficult. However, over the long term, Walmart believes that the scale of business will improve and operating profit could be a reality in FY20.
Walmart has decided to carry on its share buyback program for maintaining strong credit profile. Even though the two companies will utilize their combined strength, they will maintain their own brands and business methods. Walmart also commented on the fact that it would like to boost the local economy further and create skilled jobs by supporting the MSME sector, help farmers by procuring directly from them and develop cold storage facilities in the rural sector.
Why is the Deal Significant?
In 2017, India’s e-commerce
market stood at $38.5 billion which is expected to rise to $200 billion by 2026. So Walmart will get a second chance to get a strong foothold into the market with Flipkart which has channel expertise, streamlined supply chain management and financial strength to take on Amazon in a one-to-one battle (read: 6 ETFs to Ride On Amazon's Blowout Q1).
Even after having 21 wholesale stores and being in India for the last 11 years Walmart could not make much impact. Its deal with Bharti Enterprises also did not bear fruitful results. In being able to use the e-commerce segment, Walmart should be able to reach out to a bigger customer base, save costs and streamline operations. The CEO of Walmart Doug Mcmilon said that innovation, payments and sourcing of products are the areas where the company would be able to guide Flipkart in return for logistical and technical support as well as a massive warehouse network.
ETFs to Surge on the Deal
Post acquisition, ETFs having Walmart in its holdings is expected to rise. Let’s look at some of those ETFs where the company has a substantial stake:
iShares Edge MSCI Multifactor Consumer Staples ETF ( CNSF)
The fund tracks consumer staples securities from the U.S. large and mid-cap segment. It is a 27-component stock with an expense ratio of 0.35%. CNSF controls assets of $2.4 million and daily volume of shares traded is 1000. Walmart Inc. holds 10.02% of the assets. Also, in terms of sector holdings the Food Beverage and Tobacco controls the majority stake at 58.6%. The fund has a Zacks ETF Rank #4 (Sell).
VanEck Vectors Retail ETF ( RTH)
This fund analyzes the price and yield performance of the MVIS US Listed Retail 25 Index. Assets under management of this fund are $68.6 million with an expense ratio of 0.35%. Walmart controls 9.04% of the total holdings. The average daily volume of shares traded is 15000 and RTH has a Zacks ETF Rank #3 (Hold).
Consumer Staples Select Sector SPDR Fund ( XLP)
This fund analyses the performance of the Consumer Staples Select Sector Index. It has an expense ratio of 0.13% with average daily volume traded at 13.8 million. This large-cap equity fund has a total of $7.6 billion of assets under its control. It has 33 components, with Walmart having an 87.9% stake in it. The fund has a Zacks ETF Rank #3 (read:
3 Sector ETFs That Gained Double-Digits in Q1). Fidelity MSCI Consumer Staples Index ETF ( FSTA)
This fund analyses the investment returns of the MSCI USA IMI Consumer Staples Index. It is a large-cap fund with assets under management of $242.9 million. It has an expense ratio of 0.08%. This is a 95-component fund wherein Walmart has a 7.4% stake. This Zacks ETF Rank #4 fund has a daily trading volume of 92,000.
Vanguard Consumer Staples ETF ( VDC)
This fund tracks the performance of the MSCI US IMI Consumer Staples 25/50 Index. It has an expense ratio of 0.10%. The fund has assets of $3.5 billion in its kitty. Walmart has a 6.6% stake in this fund which has a daily average trading volume of 132,000. The fund carries a Zacks ETF Rank #3.
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