Walmart may buy more stake in Flipkart, taking holding up to 85%; this is how structure of deal looks like

The largest offline retailer Walmart is looking to strengthen it's holding further in India's e-commerce giant Flipkart, as the company in a filing with U.S. Securities and Exchange Commission (SEC) has stated to purchase additional $3 billion in the online shopping portal. Walmart has already signed an agreement to acquire 77% of Flipart at a behemoth $16 billion for a valuation of $20 billion which is now said as biggest deal in e-commerce world and also largest FDI deal in India. Walmart, which failed to make an entry in India in offline retail space with any kind of success, can now sell its products online to 1.3 billion population of the country. 

In a filing with the U.S. Securities and Exchange Commission (SEC), Walmart said, "At any time after the closing of the Transactions and on or before the first anniversary of the closing, the Purchaser, or any of its affiliates, may request that Flipkart issue additional Ordinary Shares with an aggregate purchase price of up to $3 billion."

It added, " These additional Ordinary Shares will be issued at the same price per share as the Ordinary Shares issued in the Share Issuance, subject to adjustment for any stock splits, stock dividends or similar transactions."

Walmart has already signed agreement to purchase shares worth $16 billion which is 77% of Flipkart, here's how the structure of deal looks like. 

Walmart will purchase ordinary shares issued by Flipkart for an aggregate purchase price of $2 billion in cash (the “Share Issuance”). 

Upon the terms and subject to the conditions set forth in the Share Purchase Agreement, contemporaneously with the closing of the Share Issuance, Walmart will purchase from the Sellers Preference Shares and Ordinary Shares of Flipkart for an aggregate purchase price of approximately $14 billion in cash (the “Secondary Share Purchase,” and together with the Share Issuance, the “Transactions”). Immediately after the closing of the Transactions, all Flipkart Preference Shares will convert into Ordinary Shares. 

Walmart, while signing the deal, stated that the remainder of the business will be held by some of Flipkart’s existing shareholders, including Flipkart co-founder Binny Bansal, Tencent Holdings Limited, Tiger Global Management LLC and Microsoft Corp. 

The investors who are retained together hold 37.7% in Flipkart. Post transaction, their holding may decline however they will still have a bite of the Bengaluru-based online portal. 

While remaining investors like SoftBank, which owns the highest stake of 23.62% in Flipkart, will be exiting the company, while Naspers the third largest investor has 14.57% stake. 

There are other investors who give their holding away to Walmart are - Accel India with 6.4%, eBay with 6% stake and others 6.21% stake. 

These other investors are - Greenoaks Capital, Morgan Stanley, QIA, Morgan Stanley Investment Management, Steadview Capital, Dragoneer Investment Group, Axis Bank, T.Rowe Rice and Baillie Gifford. 

Now that Walmart further plans to take additional stake of $3 billion, it is expected that the company's stake will 85% of Flipkart. Here's what will happen in Flipkartm, if Walmart acquires 85% stake. 

The veto rights for the Minority Shareholders will expire if Walmart owns 85% of the outstanding shares of Flipkart.

Among other transfer restrictions and subject to certain exceptions, transfers of Flipkart shares will be subject to a right of first refusal exercisable by Walmart and other significant Minority Shareholders, and in certain situations, co-sale rights. The right of first refusal for the Minority Shareholders will expire if Walmart owns 85% of the outstanding shares of Flipkart. 

If Walmart proposes to transfer a sufficient number of Flipkart shares such that, following the transfer, it would no longer control a majority of the Flipkart shares or appoint a majority of the Flipkart directors, each Minority Shareholder would also be entitled to transfer all of its Flipkart shares to the proposed buyer or buyers of Walmart’s Flipkart shares.

 In certain situations, Walmart and a percentage of Minority Shareholders may exercise a “drag along” right to cause the remaining Minority Shareholders to sell all or a portion of their shares in a sale of Flipkart. If the drag along right is exercised, each Minority Shareholder must be entitled to sell all of its shares in the proposed transaction. The requirement that some percentage of the Minority Shareholders approve the exercise of the drag along right will not apply if Walmart owns 85% of the outstanding shares of Flipkart. 

Pursuant to a Registration Rights Agreement to be entered into concurrently with the Shareholders Agreement, holders of 60% of the Flipkart shares held by the Minority Shareholders, acting together, may require Flipkart to effect an initial public offering following the fourth anniversary of closing of the Transactions at a valuation no less than that paid by Walmart under the Share Issuance Agreement, subject to the satisfaction of certain other conditions regarding such offering (the “IPO”). 

The Shareholders Agreement would expire upon the consummation of the IPO, whether initiated by the Board or the Minority Stockholders.

Walmart said, "The Share Issuance Agreement and Share Purchase Agreement also contain customary termination rights for the parties, including, among others, by the Purchaser if the Transactions have not closed by March 9, 2019. No termination fee would be payable by any party if the Share Issuance Agreement or the Share Purchase Agreement were terminated. "