Amazon ups the ante in Walmart-Flipkart deal talks with breakup fee of up to $2 billion

Sunny Sen April 11, 2018 6 min

Global ecommerce giant Amazon is said to have offered a breakup fee of between $1 billion and $2 billion in its talks to acquire a significant stake in Indian ecommerce leader Flipkart, three sources with knowledge of the negotiations have told FactorDaily.

A breakup fee during deal negotiations underscores the serious intent of a merger or acquisition by the party offering the fee – in this case, Amazon – and is paid to the other party if the deal doesn’t close successfully or the side offering the fee backs out of talks.

“Amazon is keen on the deal and the breakup fee can be anything north of $1 billion in a deal where Flipkart is valued at $18-20 billion,” said one of the sources on Monday, adding the quantum of the fee has not been finalised. He declined to have his or his employer’s name taken.

The Mint newspaper had reported earlier that Amazon may make a bid for Flipkart.

The breakup fee is yet to be formally made to Flipkart, a second source said. This source also didn’t want his details used in this story.

If accepted by Flipkart and its investors, Amazon and the Indian company will file a pre-filing consultancy request before anti-trust regulator Competition Commission of India (CCI) with preliminary details of the impact of the merger, should it go through. More details on this later in the story.

Flipkart is backed by deep-pocketed investors such as Softbank, Tencent, Tiger Global, Microsoft, Naspers, among others.

The breakup fee shows how keen Amazon is on a substantial stake in its Indian rival and is angling to consolidate its hold on Indian ecommerce projected by Morgan Stanley at $200 billion by 2026 – up from $20 billion now. The aggressive breakup fee has two other reasons behind it: one, it will keep away US retail giant Walmart from getting a toehold in the last single, major ecommerce market in the world. Two, it will make up for its poor showing in China.

“The breakup fee is also a turning point in Flipkart’s discussions with Walmart,” the first source said. Amazon’s move to buy a significant share in Flipkart comes at a time when the latter is in advanced discussions with Walmart to sell a substantial stake. Walmart has completed its due diligence on Flipkart, according to Mint.

Flipkart did not reply to a query sent by FactorDaily late Monday evening. An Amazon spokesperson said on mail that the company doesn’t comment on rumours and speculations. Walmart was sent a request for comment late night; we will update the story if we get a response.

Game theory at play

“Amazon has offered to sweeten the deal by agreeing to pay the breakup fee of $2 billion… Basically, the stakes are high. Amazon is pushing the offer,” according to the second source.

The breakup fee helps Amazon. “There will be due diligence for sure, but given the rival sensitivity, it might be limited due diligence, if it goes that far… The breakup fee also means Amazon might ask for an exclusive time period for negotiations,” said a third source, also insisting on anonymity.

A senior partner in a leading management consulting firm headquartered in the US said the latest Amazon offer showed how much the prospect of Walmart moving into India was weighing on the Jeff Bezos-led company. “If there is a way that Amazon can stop Walmart, they will do it. They are more worried about Walmart than Alibaba,” he said, asking not to be identified because talks between Amazon and Flipkart as also Walmart and Flipkart are still underway.

The first source said that it is still more likely that Walmart will be the winner, however, with Amazon bidding the bidding prices will go up.

“It disrupts the cosy alliance that Flipkart and Walmart were building slowly,” said the management consultancy partner.

Flipkart and Amazon together have between 75% and 80% share of the ecommerce market in India and a consolidation of this magnitude has its own benefits. “Everyday there are 1.2 million shipments happening in ecommerce. Consumerism in India is growing fast… But, even if you have the money it is very difficult to build another Flipkart,” said Sreedhar Prasad, partner and head of consumer markets at audit and consultancy firm KPMG India.

Consumerism in India is on the rise. India already has close to 100 million online shoppers. “But the next generation of shoppers, especially the younger ones will be hooked on to the mobiles to buy goods,” said Prasad. Between 2004-05 and 2011-12, India’s lower middle-class population almost doubled from 237.8 million to 446.3 million, middle middle-class went from 45.4 million to 108.5 million, and the upper middle-class from 21 million to 49.5 million.

The China bounce

That is also the reason Amazon doesn’t want to lose India, especially after its failure in China, where its market share is less than 1%. “In China, Amazon’s investments have not paid the kind of dividend it wanted. India is the only big market after China and the US,” said Raghu Viswanath, founder and managing director of brand consultancy Vertebrand.

Just like several prominent retail players came under Kishore Biyani’s Future Group umbrella after consolidation, the same will happen in ecommerce, he predicted.

What about anti-trust concerns around a merger between Amazon and Flipkart? The first source said that Amazon and Flipkart will approach the Competition Commission of India (CCI) a with the pre-filing request seeking the regulator’s opinion on the deal. “Flipkart and Amazon make for most of the ecommerce market in India and approvals from CCI will be critical,” he said.

The pre-filing consultancy will not have the terms and conditions of the merger but both Amazon and Flipkart will have to give details of what percentage of the ecommerce market will get affected if this deal goes through, how other ecommerce companies will be impacted, and other market implications. “This will happen within the next couple of months,” the source added.

Talking of advantages of a Flipkart-Amazon union, the management consultancy partner quoted without name earlier said that synergies between the two will be in four areas: logistics, procurement, branding, and marketing. “These are huge synergies that Walmart doesn’t have,” he added.

To be sure, the deal is far from done. “Nothing has been signed yet. It’s not formal yet… (I) think the odds are still in favour of Walmart,” said the third source.

The first source also said that either way with Amazon or with Walmart, some of the investors will continue to stay with Flipkart. Among them are Softbank, Microsoft, and Tiger Global. The markets in India are just opening up. “You will not always be able to buy this kind of high stake in a company like Flipkart two to three years down the line,” said the first source.


Visuals: Rajesh Subramanian

Disclosure: FactorDaily is owned by SourceCode Media, which counts Accel Partners, Blume Ventures and Vijay Shekhar Sharma among its investors. Accel Partners is an early investor in Flipkart. Vijay Shekhar Sharma is the founder of Paytm. None of FactorDaily’s investors have any influence on its reporting about India’s technology and startup ecosystem.