India's FlipKart Is a Prize for Walmart or Amazon

Teresa Rivas

Updated April 12, 2018 12:21 p.m. ET

On Wednesday, shares of Walmart (WMT) were lower on reports that the retail giant would beat Amazon.com (AMZN) in a contest to acquire India's major online marketplace, FlipKart.

According to Bloomberg, both bidders value FlipKart about $20 billion--up from $12 billion just one year ago. Walmart proposes a minority stake that could rise to 50% or 60% over time, while Amazon prefers to acquire a significant stake immediately. Sources close to the situation say that FlipKart is leaning toward Walmart's offer, given that that bidder currently has no online presence in India, making it easier to get regulatory approval for the deal; Amazon, however, is reportedly ready to offer a high breakup fee (up to $2 billion) to sweeten its deal. Neither company has commented publicly on the news.

Morgan Stanley's Brian Nowak takes a look at situation today, writing that it's easy to see why both companies are interested in FlipKart.

For Amazon, Nowak writes that India offers the "largest greenfield market opportunity" that it's competing in, thanks to an estimated $200 billion total addressable market by 2027. (Online spending may top 12% of retail in the next decade, up from just 3% last year.) Amazon is making headway in India, which the analyst speculates accounts for a significant portion of its "other" international retail business that the company doesn't break out. That segment could account for 30% of Amazon's total retail revenue growth in the next three years. Nowak believes that Amazon sees a less-competitive/more-rational market in India if it can team up with FlipKart.

Walmart's interest in India has also significantly increased in recent years, with management highlighting the country just last year as a great growth opportunity. Nowak writes that India is critical to Walmart's strategy, given its size, and "in terms of population, a lack of ecommerce in India is a major void in Walmart's footprint." By way of contrast, in China, Walmart has already established more than 400 stores and has a 12% investment in JD.com (JD). Moreover, Nowak writes that Walmart's interest in FlipKart shows that it may be looking to get more offensive, rather than defensive, against Amazon's strategy of gaining ground in emerging markets.

He has an Outperform rating on Amazon and Neutral rating on Walmart. Walmart is up 0.5% to $86.33 this afternoon, while Amazon is climbing 1.3% to $1,445.70. The SPDR S&P Retail ETF (XRT) is climbing 0.2% to $45.14 in recent trading.

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