DBRS Confirms Walmart Inc. Ratings Following Announcement to Acquire Majority Stake in Flipkart Group

DBRS Limited (DBRS) confirmed Walmart Inc.’s (Walmart or the Company) Issuer Rating and Senior Unsecured Debt rating, both at AA with Stable trends, following the Company’s announcement that it has signed definitive agreements to become the largest shareholder in Flipkart Group (Flipkart). Walmart will pay approximately $16 billion for an initial stake of approximately 77% in Flipkart, with the remainder held by some of Flipkart’s existing shareholders (including Flipkart co-founder Binny Bansal, Tencent Holdings Limited, Tiger Global Management LLC and Microsoft Corporation). The deal is subject to regulatory approval in India and is expected to close later in 2018.

Walmart intends to finance the investment through a combination of newly issued debt and cash on hand. DBRS notes that Walmart’s investment includes $2 billion of new equity funding to help Flipkart accelerate growth in the future. DBRS also notes that the two companies are in discussions with additional potential investors, which could result in Walmart’s stake decreasing after the transaction is complete. However, Walmart intends to retain a clear majority ownership.

Founded in 2007 by two former Amazon employees, Flipkart is one of India’s largest e-commerce marketplaces and includes group companies Flipkart, Myntra, Jabong, and PhonePe. Myntra and Jabong hold prominent positions in the online fashion market and PhonePe is a unified payment interface app. During the fiscal year ended March 31, 2018, Flipkart recorded gross merchandise value (GMV; defined by Flipkart as representing the total dollar value of orders processed on its marketplaces in the period without reduction for returns) of $7.5 billion and net sales of $4.6 billion (representing more than 50 per cent year-over-year growth in both cases) with 54 million active users and 261 million units sold. According to Walmart, Flipkart Group maintains leading positions in categories including fashion, mobile, electronics and large appliances. Walmart expects e-commerce in India to grow four times faster than total retail through 2023 and believes Flipkart is well-positioned to capitalize on this growth. Walmart noted that while Walmart and Flipkart will leverage the combined strengths of both companies, they will maintain distinct brands and operating structures. Currently, Walmart has a relatively small presence in India, operating 21 Best Price cash-and-carry stores and one fulfillment center in 19 cities across nine states in India, with more than 95 per cent of sourcing coming from India.

DBRS believes the acquisition reflects Walmart’s strategy to invest in higher growth opportunities, particularly in e-commerce, while divesting of operations in highly competitive and lower-growth international markets. Walmart expects Flipkart to continue to generate losses in the near to medium term while the Company continues to invest in and accelerate growth. As the business scales and efficiencies are realized, Walmart expects losses to decline and returns to ultimately turn positive. DBRS believes the acquisition has a slightly positive effect on the Company’s business risk profile as the Company increases its geographic diversification and invests in higher-growth opportunities.

In terms of Walmart’s financial profile, the decrease in earnings and the increase in debt will have a negative impact on credit metrics over the near term. Should the Company finance the transaction with only debt, lease-adjusted-gross-debt-to-EBITDAR would likely increase to above 2.25 times (x) on a pro forma basis from 1.82x for the year ended January 31, 2018 (F2018). That said, DBRS expects the Company to fund the acquisition at least partially with cash (Walmart has approximately $6.7 billion in cash and cash equivalents at the end of F2018). Going forward, Walmart will continue to generate significant free cash flows before working capital and after dividends ($8.9 billion and $8.5 billion in F2018 and F2017, respectively, approximately 17% of lease-adjusted-gross-debt in both years), which the Company could at least partially use to repay debt. Additionally, DBRS notes that the Company will receive approximately $4.1 billion in cash from the combination of Walmart’s wholly owned U.K. retail subsidiary, Asda Group Limited and Sainsbury plc after the transaction closes (which may not be until the second half of 2019) (see DBRS press release, “DBRS Comments on Combination of J Sainsbury plc and Walmart Inc.’s Wholly Owned Subsidiary Asda Group Limited” from May 1, 2018), which should provide the Company with additional flexibility to reduce leverage. As such, DBRS believes that the key credit metric of lease-adjusted-gross-debt-to-EBITDAR could return toward 2.0x within 12 to 18 months, which would be appropriate for the current rating category. However, should leverage remain elevated and operating performance weaken, the ratings could come under pressure.

Walmart’s ratings continue to be underpinned by the Company’s large size, dominant market position, relative resilience to economic cycles, operating efficiency and robust cash-generating ability. DBRS notes that the ratings also continue to consider the highly competitive retail industry and Walmart’s mature and saturated home market as well as risks associated with the Company’s international expansion.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Merchandising Industry, which can be found on dbrs.com under Methodologies.

This rating was not initiated at the request of the rated entity.

This rating is no longer endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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