‘An option on the future’: Quick take on Walmart’s acquisition of Jet.com

Walmart has announced it will acquire e-commerce site Jet.com for $3B in cash (3x annual gross merchandise value) plus a potential $300m more in Walmart shares. Jet, which launched in July 2015, provides low prices on 12 million products from over 2,000 sellers.

Implications

1. A marriage of convenience:

• Walmart is falling behind in the e-commerce race: Despite its scale ($482B revenue in 2015, and the second largest e-commerce presence in the US), Walmart has just 14% of Amazon’s nearly $100B in e-commerce sales and the trajectory is slowing. In 1Q16, Walmart’s e-commerce revenue grew just 7% year on year — its eighth quarter of slowing year on year growth and slower than the 15% year on year growth in the overall US e-commerce market:

• To compete with Amazon, Walmart had to act. In buying Jet, Walmart is making a bet on Jet’s technology (particularly around pricing — more on this below), talent (Jet co-founder Marc Lore previous co-founded the parent company of Diapers.com, sold for $550m to Amazon in 2011, and is expected to run Walmart’s e-commerce initiatives) and, to a lesser extent, its complementary reach (following it launch 13 months ago, Jet has already achieved a $1B run rate in annual gross merchandise revenue, and is most popular with older millennials (28–36 years of age).
• Jet fuel is expensive: Jet raised $820m over four rounds of fundraising, is spending $20m-$25m per quarter on marketing, unprofitable, and did not anticipate profitability until at least 2020. Jet’s original intention to monetise primarily through a $50 annual membership fee was abandoned. As well as its ability to leverage its physical assets to help Jet achieve profitability sooner, Walmart’s deep pockets will be key. Walmart had $22.4B of pre-tax profit in 2015 and $7.6B in cash on hand following 1Q16. Given the 88% uplift from Jet’s last valuation of $1.6B, this exit is likely to bring relief.

2. An option on the future

E-commerce remains a vast, underpenetrated opportunity in the US (see below). At 7.8%, retail e-commerce as % total retail sales in the US is half that of the UK and even lower compared with China’s 20% adoption. Walmart has been spending nearly $15B in capex over the last four years to open new stores; spending 1.3% of its market capitalisation for an option on the future appears reasonable. (When HP acquired Autonomy to reposition from hardware to software, it paid 15% of its market capitalisation, most of which was later written off). US companies have more cash on their balance sheets — $1.7 trillion — than ever before. Sensible investments in waves of disruption will yield better returns than share buybacks.

3. 2016’s M&A market remains in rude health

At $3.3B, Walmart’s acquisition of Jet is the largest e-commerce deal ever and further evidence of a bumper M&A market in 2016. The acquisition exceeded: QVC’s $2.4B acquisition of Zulily in 2015; Alibaba’s deal for a majority stake in Lazada at a $1.5B valuation in 2015; Amazon’s $1.2B acquisition of Zappos in 2009; Rakuten’s $1B acquisition of Ebates in 2014; and Unilever’s $1B purchase of Dollar Shave Club DSC for last month. Recent macro-economic volatility does not appear to be impinging on deal flow.

4. The value of ‘Discount Tech’

Jet’s technology and proposition were optimised for value; purported to offer goods for 10% cheaper or more. The more users shopped, the larger the discounts they are offered. Incentives are provided for users to buy goods located in the same distribution centre, to save Jet shipping costs. Users can decline the ability to return goods in return for a lower price. And Jet offered a ‘discounts for data’ proposition, offering reduced prices explicitly in return for users giving email addresses and progressive amounts of data. We’re likely to see this trend increasing — and given the diffusion of value the wider data are shared, early leaders here will prosper.