When two struggling companies hook up, you know there will be fun times ahead.
In a three-way, cross-border deal announced Monday, unprofitable Chinese online retailer JD.com bought another Chinese online retailer, Yihaodian, from embattled North American retailer Wal-Mart. What could go wrong?
Rather than selling out of Yihaodian and walking away, Wal-Mart has decided to stick with it. JD.com will own Yihaodian, an internet grocery store, but Wal-Mart will continue to run it.
There are synergies, the companies promised, including Yihaodian's edge in southern and eastern China. JD.com investors agreed, sending the stock up 4.6 percent. Wal-Mart shareholders? Well, they shrugged.
From a financial perspective, the transaction doesn't look like a bad one for either party. Wal-Mart gets a 5 percent stake in JD.com, an interest worth just shy of $1.5 billion. That's pretty close to the valuation at which the U.S. behemoth took full control of Yihaodian last July. Given arguments could be made either way for a number slightly higher or slightly lower, $1.5 billion seems a fair figure.
Part of the logic is to leverage each other's supply chain, product catalogs and logistics networks.
That Yihaodian's direct-sales business will remain under Wal-Mart management might be a concern, considering the world's biggest retailer has struggled to turn it around. Then again, JD.com's inability to make its own direct-sales business profitable isn't an endorsement of its executive team either.
And that's kind of the point. Neither company has been able to find much success with e-commerce in China, so there's not a lot to lose from joining forces in a bid to shake up the market.
JD.com gets to expand in a growth category -- household goods and groceries, with access to Wal-Mart's coveted slew of fresh foods. Wal-Mart, meanwhile, has a new channel to sell its huge range of products online. The companies are also betting the deal will push more shoppers to Wal-Mart's physical stores, plus give JD.com customers timely access to the American retailer's warehouses of imported goodies.
Fast delivery is something Wal-Mart, which is just coming off a decline in same-store sales in China, could benefit from. U.S. sales at established stores in the last quarter rose a paltry 1 percent last quarter.
Wal-Mart executives know they need to find creative ways to grow. JD.com, on the other hand, doesn't lack growth, just profit. In this case, one plus one may equal more than two, allowing the duo to save money and live better.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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