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Analysts voice concern about Walmart's e-commerce prospects after Flipkart deal

‘Death by Amazon’…Don't Believe the Hype

Street Talk Podcast

Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution

National Broadband Initiatives Crucial To Asia-Pacific Broadband Market Success

Electric Vehicle Infrastructure: U.S. Utilities Getting Charged Up, but Are Regulators Plugged in to the Concept?


Analysts voice concern about Walmart's e-commerce prospects after Flipkart deal

Walmart Inc.'s $16 billion deal to acquire a majority stake in Indian e-commerce player Flipkart Online Services Pvt. Ltd. is making some analysts nervous about the retail giant's e-commerce prospects.

The Flipkart acquisition is Walmart's largest in the last 10 years at $16 billion, according to data compiled by S&P Global Market Intelligence. It is also Walmart's second pricey deal for an unprofitable e-commerce startup. It bought Jet.com in 2016 for $3.3 billion and has yet to make the business profitable.

The Flipkart deal turns the spotlight on Walmart's first-quarter earnings due May 17, said Brian Yarbrough, an analyst at Edward Jones. Walmart reported U.S. e-commerce growth in February of 23% for the fiscal fourth quarter, down from 50% the quarter before. Yarbrough said that Walmart needs to report growth in the 30% range to keep the market optimistic about the company's e-commerce efforts.

"That makes e-commerce growth this quarter so important," he said in an interview. "Investors are going to want to see that there's some substance behind the claim that they can scale an e-commerce model successfully."

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The Flipkart deal, which Walmart said will weigh on its results for the next couple of quarters, will be dicey for a lot of investors, said Rupesh Parikh, an analyst at Oppenheimer.

"This deal adds new risk at a time investors have been looking at Walmart to streamline their business," he said. "This has the potential to really derail some of the progress they've made."

Walmart now has to scale and bring a new, more expensive e-commerce company to profitability, which will likely call for more investments beyond the $16 billion value of the deal. That is a tall order when the company has no proof it can do that in its core U.S. market, Parikh said.

"Walmart is walking a fine line between investment and profitability right now," he said. "Growing an e-commerce company is really, really expensive, and there's no guarantee that Walmart, or anyone, can do that very well."

Walmart declined to comment and referred journalists to its May 9 analysts' call on the deal.

Growing Flipkart's business could result in "sizable losses" for Walmart in the short term, analysts at RBC Capital Markets said in a note circulated to clients May 9. That is especially true as Walmart positions itself as an online competitor to e-commerce giant Amazon.com Inc., which also reportedly put in a bid for Flipkart.

"They are fighting Amazon on every product front, they bought the money-losing Jet.com business, which added to their already-high operating losses in e-commerce and they are increasingly fighting for market share in grocery, primarily using 'price' as their main competitive weapon," the analysts wrote. "All of these are profit negative."

To be sure, there would likely be long-term benefit to the Flipkart deal, both analysts and Walmart executives said. Gross merchandise volume of online retailers in India jumped to $17.8 billion in 2017 from $4.5 billion in 2014 and is forecast to reach $28 billion in 2018, according to Indian management consulting firm RedSeer, which expects growth to continue to $50 billion in 2020.

Douglas McMillon, Walmart CEO and president, told analysts that Flipkart is a foothold in the growing Indian e-commerce market. Flipkart also has a logistics business and a payments business that has potential for the broader international segment of Walmart, said Judith McKenna, president and CEO of Walmart International, on the same call.

Both Yarbrough and Parikh said that the deal could set Walmart up to compete with Amazon in India, and that the investment has a chance to help Walmart grow in the long term.

"They just have to execute on e-commerce first," Yabrough said.

Walmart's Flipkart deal helps illustrate the significance of the Asia-Pacific region to global retail M&A activity. Year-to-date, retail M&A transactions have totaled $27.56 billion with Asia-Pacific accounting for $19.95 billion of the total, according to data compiled by S&P Global Market Intelligence.

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The Flipkart deal should not significantly hurt Walmart's credit profile, Moody's lead retail analyst Charlie O'Shea said, calling the impact "relatively benign." The rating agency views the deal "favorably," he said.

"As Flipkart is expected to generate meaningful losses for at least the next five years, this is clearly an investment for the future," he said.

Fitch affirmed Walmart's long-term issuer default rating at AA after the Flipkart announcement. The analysts said the rating reflects Walmart's "dominant retail market share position."

S&P Global Ratings, however, lowered its outlook on Walmart to "negative" from "neutral," based on "a potential shift in financial policy" resulting from the Flipkart deal, S&P Global Ratings analyst Diya Iyer said in an interview. The $16 billion deal will be financed with cash and debt, Walmart said. That is a departure from other large deals. The Jet.com acquisition, for example, was funded largely with cash.

S&P Global Market Intelligence and S&P Global Ratings are owned by S&P Global Inc.


Credit Analysis
‘Death by Amazon’…Don't Believe the Hype

Highlights

Written by Camilla Yanushevsky, with analysis contributions from Melissa Doscher, Senior Manager, Risk Services, and Jim Elder, Director, Risk Services

Is Amazon unstoppable? And if so, what is Amazon’s next target?

May. 23 2018 — From an online bookseller that launched in 1995 to a high-tech conglomerate with global reach, Amazon.com Inc. has a bullseye on every market it touches. Today, Amazon is a retailer, hardware developer, cloud services provider, content streaming service, clothing designer, and, more recently, a home security company with its announcement to purchase Ring Inc. on February 27, 2018.

The company has rallied 37% this year, crushing Wall Street expectations for its first quarter earnings, posting $1.6 billion in profit and prompting nearly two dozen firms to up their price targets on the e-commerce giant. A few of those newly minted price targets place the company north of the $1 trillion threshold.1

Not surprisingly, the market is questioning — is Amazon unstoppable? And if so, what is Amazon’s next target?

How do Amazon’s acquisitions stack up?

Amazon, along with its subsidiaries, has made 96 merger and acquisition transactions since its 1995 launch, the largest being its acquisition of Whole Foods Market Inc. for approximately $13.7 billion, announced on June 16, 2017.

Figure 1: Amazon's largest acquisitions ($M) from January 1, 2008 – April 27, 2018

Figure 2: Amazon’s M&A activity by industry (%)

To compare the disruptive impact of innovation in the various sectors that Amazon has entered, we looked at Amazon’s 10 largest deals announced since January 1, 2008 and examined industry and company-level probability of default (PD) changes using our PD Market Signal Model, a structural model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one-to-five year horizon.

Among these 10 major acquisitions, Amazon’s announcement to purchase food retailer Whole Foods Market Inc. on June 16, 2017 was the most disruptive, with the food retail sub-sector PD increasing from 3.73% on June 15, 2017 to 4.85% on June 23, 2017, or by about 30%. We attribute the PD escalation to the sheer size of the transaction, more than 10x the size of any of its past transactions, as well as the saturation within the food retail sub-sector.

But is the Amazon hype overblown?

With the exception of the Whole Foods purchase, our PD Market Signal model shows Amazon may not be the ‘Death Star’ it is hyped up to be. Seven of Amazon’s 10 largest acquisitions –Annapurna Labs Ltd. (Semiconductors), Souq.com FZ-LLC (Internet and direct marketing retail), Elemental Technologies LLC (Application software), Ring Inc. (Consumer electronics), Zappos.com Inc. (Internet and direct marketing retail), Twitch Interactive Inc. (Internet software and services), and Audible Inc. (Internet software and services)had a positive impact on the short-term market perceived quality of the target industry, with the magnitude of PD changes significantly greater for Amazon’s more recent acquisitions Annapurna Labs Ltd. (01/22/2015), Souq.com FZ-LLC (03/28/2017), and Elemental Technologies LLC (09/03/2015).

By contrast, only slight PD changes were observed for acquisitions during Amazon’s earlier years – Zappos.com Inc. (07/22/2009), Twitch Interactive Inc. (08/25/2014), and Audible Inc. (01/30/2008) when the market perception of the “Amazon Effect” was less in full flight.

In the case of Amazon’s most recent announcement to buy Ring Inc. for $992.8 million, we attribute the positive impact – the median PD for the consumer electronics sub-sector decreased 13.76% from 9.45% on February 26, 2018 to 8.15% on March 6, 2018 – to the lack of a ‘surprise factor.’ Amazon had previously invested in Ring through the Alexa Fund, which exclusively provides funding to Alexa-enabled devices.

Figure 3: One-week median U.S. Industry Market Signal Probability of Default change following Amazon’s acquisition announcement: January 1, 2008 – April 27, 2018

On a company-level, the “Amazon Effect” is more obvious. For example, significant escalations in PD were observed for both small- and large-cap companies in the peer groups of the acquired companies. Small-cap WOD Retail Solutions Inc.’s one-year PD increased from 0.12% on August 24, 2014 to 1.81% on September 1, 2014 (1,409.73% change) following Amazon’s announcement to acquire live streaming video platform company Twitch Interactive Inc. Similarly, Alphabet Inc.’s PD rose 170.75% from .03% on January 29, 2008 to .08% on February 6, 2008, following Amazon’s decision to buy Audible Inc., one of the world’s largest audio entertainment and information providers, on January 30, 2008.

Figure 4: Amazon’s target peer group: Largest changes in One-Week Market Signal Probability of Default following acquisition announcement, January 1, 2008 – April 27, 2018

What is Amazon’s next battleground?

While Amazon’s plans with Ring have yet to be disclosed, the deal certainly gives Amazon a leg up on Google and Apple in the smart home market, which many market participants expect to be Amazon’s next battleground. Ring already supports Amazon’s virtual assistant Alexa, which Amazon’s Director of Applied Science and Alexa Machine Learning, Ruhi Sarikaya, recently announced will soon be able to track memory and context.2

Ring, alongside Alexa can be leveraged with the smart lock system, Amazon Key, to facilitate the safe delivery of Amazon products in home. In just a few years, the trifecta Ring-Key-Alexa integration could lead to a completely new home landscape from security, to deliveries, and even lifestyle. Intelligent personal assistants, smart keys and video doorbells could be as ubiquitous as television sets.

While the immediate impact of the Ring acquisition might have had a positive impact on the sub-sector’s PD, this move might provide a glimpse into how disruptive Jeff Bezos’ longer-term strategy might be. With its smart doorbells and security cameras, Ring literally opens the door for Amazon to start selling services, not just goods. Is the market letting a giant through the front door?

Would you like to learn more about the credit risk solutions and sector data used in this article's analysis? Request more details

1 McDonald, L. (2018, May 08). Why Amazon could be the next black swan for the market.

2 Making Alexa More Friction Free (April 25, 2018). Retrieved April 27, 2018.

Beyond Amazon, Alibaba Leads Disruptive Innovation In Race To $1 Trillion Valuation

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Listen: Street Talk Episode 23 - As More Banks Reach for Yield, Advisers Urge Caution

More banks are reaching further out the yield curve in their loan portfolios to meet customer demands but, increasingly, advisers believe institutions need to proceed with caution. In the episode, experts from PIMCO, Sandler O’Neill, Chatham Financial and PrecisionLender discuss rate risk and how banks focused on funding will ultimately prove the winners.

Street Talk is a podcast hosted by S&P Global Market Intelligence.

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Technology, Media & Telecommunications
National Broadband Initiatives Crucial To Asia-Pacific Broadband Market Success

Highlights

The following post comes from Kagan, a research group within S&P Global Market Intelligence.

To learn more about our TMT (Technology, Media & Telecommunications) products and/or research, please request a demo.

May. 17 2018 — This year's Broadband Forum Asia, held in Bangkok, Thailand, April 24-25, focused on ways to accelerate the growth of fixed broadband markets in developing countries. Looking at the success of advanced fixed broadband markets in the Asia-Pacific region, executives agreed that government participation is crucial to success.

In 2013, the Chinese government launched the Broadband China initiative with an investment of $323 billion and a target of full nationwide broadband coverage by 2020. The government has focused on accelerating fiber deployments, driving fiber's share of broadband households from 21.6% in 2013 to 84.2% in 2017. China has also become the world's largest fixed-line broadband market with an estimated 348.5 million subscribing households at year-end 2017.

Similarly, Vietnam's broadband initiative aimed at driving economic growth through fiber deployments accelerated fiber's share of broadband households from 47.4% in 2015 to 77.5% in 2017. Although the country's broadband penetration rate remains relatively low, Vietnam is one of the fastest growing fixed broadband markets in the Asia-Pacific region. Le Trung, deputy director of the infrastructure development center at FPT Telecom, said Vietnam is on the right track in terms of migration from asymmetric DSL, or ADSL, to gigabit passive optical networks, or GPONs. Trung further explained that FPT is positive about achieving 10 Gbps PON connections in the future after reducing its CapEx and operating expenses through advanced technology, including the use of software-defined networking optical line termination, or SDN OLT.

Broadband and fiber penetration by market in 2008 (%)Broadband and fiber penetration by market in 2017 (%)

Harin S. Grewal, cluster director of networks and technology for Singapore's Info-communications Media Development Authority, or IMDA, noted that the government provides grants of up to S$750 million (US$569 million) and S$250 million (US$190 million), respectively, to network companies (responsible for passive infrastructure including wirelines and ducts) and operating companies (responsible for active infrastructure including switches and routers), both for a license period of 25 years. In return, operators are obliged to meet fiber rollout and adoption targets under this initiative, called the Next Generation National Broadband Network, or NGNBN.

As of April, 13 operating companies are funded by NGNBN in Singapore while the number of retail fixed broadband service providers has increased to 28 from three when the program was launched in 2010. With the entry of more operators, Singaporean broadband subscribers enjoy competitive services and pricing with an average revenue per user of $25.33 and affordability index of 0.3% based on the market's 2017 per capita gross national income purchasing power parity.

Speed is another important indicator of the success of a broadband market. The Singaporean government requires new operators to reach a minimum of 100 Mbps peak downstream bandwidth and 50 Mbps peak upstream bandwidth per end-user connection by its launch; they are also expected to improve with downlink bandwidths exceeding 1 Gbps in the future.

Singapore achieved nationwide fiber coverage in mid-2013 and fiber is being deployed in new buildings. Hong Kong, on the other hand, struggles to extend fiber coverage to remote locations such as villages and outlying islands. Government plans to subsidize operators for expanding fiber coverage to about 380 villages is expected to drive marginal growth of the broadband market.

Global Multichannel is a service of Kagan, a group within S&P Global Market Intelligence's TMT offering.

As of April 25, 2018, US$1 was equivalent to $1.32.


Energy
Electric Vehicle Infrastructure: U.S. Utilities Getting Charged Up, but Are Regulators Plugged in to the Concept?

Highlights

Electric vehicles allow consumers to realize transportation fuel savings and states to meet their emissions-reduction goals, and offer utilities a unique business opportunity. A recent report identifies regulatory initiatives that address the issue.

Until a few years ago, the nation's electric utilities had little direct interest in the automotive industry. While fleet vehicles have always been part of the utilities' infrastructure maintenance and customer service activities, and utilities with auto industry customers have always been impacted by the sector's overall health, few people recognized the full direct impact that electric vehicles, or EVs, could have on the utilities' business prospects until it became clear that EV technologies were viable, and that consumers were willing to begin moving away from vehicles with combustion engines. It is now becoming apparent that EVs could foster significant new demand growth for the electric utility sector after more than a decade of sluggish to negative growth in most parts of the country.

In addition to allowing consumers to realize significant transportation fuel savings and certain states to meet their ambitious emissions-reduction goals, EVs clearly offer the utilities a unique business opportunity. Electric sales for most utilities have been flat for several years due to sluggish economic growth and widespread adoption of conservation initiatives, and EV investments and, more broadly, increased use of electricity to charge EVs could be a boon to many utilities in the years ahead.

While many utilities have indicated interest and plans to pursue opportunities in the EV market, quantifying investments is a challenge due largely to companies not providing a clear delineation of commitments to capital costs, versus expense allocations.

Based on a preliminary analysis of the EV sector, Regulatory Research Associates, an offering of S&P Global Market Intelligence, has discerned certain key trends, as summarized below.

  • In states that have a strong focus on renewable energy development and alternative energy technologies, the backbone charging infrastructure for EVs is more developed than it is in those states that have been reluctant to adopt policies supportive of the industry. For example, California, which has been supportive of the nascent EV sector, leads the nation both in terms of the number of EVs in use and the number of charging stations, and has been a leader in calling for more stringent emissions reductions.
  • A significant issue that utility commissions are grappling with is whether third-party entities that own EV charging stations should be treated like regulated utilities due to the fact that they are essentially resellers of electricity. Utilities in some jurisdictions are interested in investing in charging stations and seeking rate base treatment of their investments, while utilities in other jurisdictions are primarily focused on ensuring that adequate distribution infrastructure is in place to support third-party charging stations and the beneficial impact that EVs are expected to have on electric sales.
  • There is a need to design time-of-use rates to incentivize off-peak EV charging, thereby minimizing adverse effects on the larger distribution grid. In fact, if structured correctly, funneling load to off-peak periods could smooth out demand, creating less dramatic peaks and valleys, thereby allowing the grid to operate more efficiently.
  • Certain regional approaches are being taken to standardize EV policies and infrastructure development. For example, in 2013, the governors of eight states, namely California, Connecticut, Maryland, Massachusetts, New York, Oregon, Rhode Island, and Vermont, established the ZEV Program Implementation Task Force, which is a coordinated approach to support policies to foster the development of EV markets and the required charging infrastructure, and "remove barriers to the retail sale of electricity and hydrogen as transportation fuels and promote competitive plugin electric vehicle charging rates."
  • In October 2017, the governors of Colorado, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming signed a memorandum of understanding that calls for collaboration to create an "Intermountain West Electric Vehicle Corridor." The agreement calls for promoting EV market development and establishing standards for EV fast-charging corridors across these states.

Although the ZEV Program Implementation Task Force and the agreement to create the Intermountain West Electric Vehicle Corridor are perhaps the most disciplined attempts to date to standardize EV related policies for maximum efficacy, many other jurisdictions are addressing the matter on a case-by-case basis.

For further information concerning key regulatory initiatives, prominent legislation, and noteworthy proceedings addressing generic EV related matters, refer to RRA's Special Report dated May 2, 2018.

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Insights Into Rate Case Proceedings And Other Major Regulatory Activity Pending For U.S. Energy Utilities

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