Walmart got a $10 billion surprise

Bangalore: When Walmart Inc. paid $16 billion for control e-commerce pioneer Flipkart Online Services Pvt Ltd last year, the American retail giant got a little-noticed digital payments subsidiary as part of the deal. Now the business is emerging as one of the country’s top startups, a surprise benefit for Walmart from its largest-ever acquisition.

Flipkart’s board recently authorised the PhonePe Pvt Ltd unit to become a new entity and explore raising $1 billion from outside investors at a valuation of as much as $10 billion, according to people familiar with the matter.

The funding may close in the next couple of months, although the talks are not finalised and terms could still change, they said. The unit would then become independent with a distinct investor base, although Walmart-owned Flipkart would remain a shareholder. Walmart and Flipkart didn’t respond to emails seeking comment.

PhonePe has grown into one of the leading digital payments companies. Its volume and value of transactions have roughly quadrupled over the past year. PhonePe is gaining ground on Paytm, which leads the field and is backed by Warren Buffett.

PhonePe is an “underappreciated asset,” Edward Yruma, Analyst from KeyBanc Capital Markets, wrote in a recent research note. He estimated the business may be worth $14 billion to $15 billion, separate from Flipkart’s e-commerce operation.

The startup was founded in December 2015 by three friends who left Flipkart to get it off the ground. Within a year, Flipkart founders Binny Bansal and Sachin Bansal decided to acquire PhonePe, realising that solving payments friction would make it easier for consumers to buy online. Less than a year later, the government announced demonetization, helping Paytm, PhonePe and other fledgling services to flourish.

In June, the PhonePe app reached 290 million transactions with an aggregate value of $85 billion, compared with 71 million transactions at $22 billion a year earlier, according to the company.

The service gained momentum by offering an array of services, including mutual funds, movie tickets and airline bookings. Earlier this year, it began using Bollywood star Aamir Khan in its advertising.

“Globally, hardly any privately held fintech company has reached PhonePe’s scale on both sides of the network so rapidly,” Sameer Nigam, PhonePe’s Co-Founder and Chief Executive Officer, said in a statement, pointing to its 150 million plus customers and more than 5 million merchants. “That’s why the strong investor interest.”

Walmart debated for months whether to keep funding the payments business internally or whether to separate the operation so it could raise outside funds. After plowing nearly $300 million into PhonePe, the US retailer opted for the latter course. Alibaba Group Holding Ltd made a similar decision when it split off its Alipay business, helping growth by allowing it to work with a broader range of merchants.

Walmart wants to use the lessons from PhonePe in other operations around the globe.

The new funding is aimed at helping PhonePe’s growth. The company plans to delve deep into the country’s heartland, where rivals have yet to expand, with the goal of reaching profitability, one person said.

The market has vast potential. Digital payments in India are projected to reach $1 trillion by 2023 from about $200 billion now, said Credit Suisse Group. Beyond PhonePe and Paytm, Google Pay, Amazon Pay and the soon-to-launch WhatsApp payments service will compete for customers.

— Bloomberg