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Wal-Mart to buy Jet.com in $3.3 billion deal

The largest-ever acquisition of an e-commerce company likely won't be enough for Wal-Mart to dethrone Amazon. But there's no shame in playing for second.

In a bid to juice its online business, the world's largest retailer agreed Monday to purchase Jet.com in a $3.3 billion deal. The acquisition will beef up Wal-Mart's e-commerce prowess, from deepening its bench of talent to finding the cheapest way to ship online orders.

These capabilities should help Wal-Mart grab a larger piece of the growing e-commerce pie. They're also the best chance it has of closing the wide — and growing — gap between it and Amazon, analysts said.

"Amazon's got this huge lead. That lead is going to be tough to relinquish but there's a lot of [share] out there," Moody's analyst Charlie O'Shea told CNBC.

Amazon's North America sales topped $62 billion last year. Forrester estimates the company grew its U.S. retail business by $23 billion, accounting for roughly 60 percent of total digital sales growth here.

Those numbers are enviable, especially among its bricks-and-mortar competitors. Still, with Forrester calling for $373 billion in online revenue in the U.S. this year, "there's room for everybody to grow," O'Shea said.

"These guys aren't just kind of sitting there and letting the world do what it wants to do," O'Shea said.

Though Wal-Mart's e-commerce growth its slowing, its $13.6 billion in digital revenue already make it the second-largest online retailer. Yet even if it remains in second place, Jet is still worth the hefty price tag, analysts said.

"I think they're playing for first and they may have a chance at it, but even if they take second place, there's a broad [range]," said Drew Carter, a managing director at AlixPartners. For instance, if an acquisition pumps Wal-Mart's digital growth from, say, 10 percent to 15 percent, "it's probably worthwhile," he said.

Buying Jet was necessary for Wal-Mart to have a shot at catching Amazon, Carter said. Not only does the online brand give Wal-Mart a fresh roster of digital talent, it can also help the company fine-tune its shipping and online logistics — a crucial part of preserving margins.

Jet's co-founder and CEO Marc Lore will lead both Jet and Wal-Mart.com, bringing his vast e-commerce experience as a co-founder of Quidsi, the parent of Diapers.com, which was sold to Amazon. These factors outweigh the fact that Jet is not yet profitable, Carter said.

"The potentially dilutive nature of the Jet acquisition, that's very short term," he said. "The long-term value is buying their way into this expertise."

On a call with reporters Monday afternoon, Wal-Mart CEO Doug McMillon said his company's scale will help Jet become profitable more quickly than it could on its own.

An employee prepares shipping boxes at the Jet.com fulfillment center in Kansas City, Kansas.
Daniel Acker | Bloomberg | Getty Images
An employee prepares shipping boxes at the Jet.com fulfillment center in Kansas City, Kansas.

O'Shea added that the lofty $3.3 billion price tag makes sense for Wal-Mart to pay, as it shifts its capital expenditures from its bricks-and-mortar stores to the web. Even as the company invests in its online operations and higher wages, it's spending less capital overall.

The retailer's capital expenditures budget for the five years ended January 2012 was roughly $15.5 billion, during which time it opened more than 3,000 stores, O'Shea said. That compares with $14.6 billion over the last four years, when it only opened 1,000 stores. Many of those were smaller format, making them less capital intensive. Wal-Mart had $7.6 billion in cash and cash equivalents at the end of the first quarter.

The world's largest retailer said a portion of the $3 billion it's paying for Jet, along with $300 million in Wal-Mart shares, will be spent over time. Terms of those payments were not disclosed. The company likewise did not update its guidance, and said details regarding funding for the acquisition and Lore's compensation will come at a later date. The company's shares were slightly lower, near $73, in afternoon trading.

The deal is expected to close this year, subject to regulatory approval. After the deal closes, Wal-Mart and Jet plan to maintain distinct brands, with Wal-Mart's website continuing to focus on emphasizing the company's "everyday low price" strategy, while Jet.com provides a curated experience that targets millennials. However, certain design elements from Jet will be incorporated at Walmart.com over time, McMillon said.

Although Jet has been operating its site for only a little more than a year, it has already reached $1 billion in run-rate gross merchandise value, and boasts a growing customer base of urban and millennial customers. The site says it has been adding more than 400,000 new shoppers each month and processes an average of 25,000 orders daily.

Jet uses an algorithm that it promises will deliver lower prices. Customers can save by buying in bulk from the site, or by forgoing the chance to make a return. The company originally planned to charge a $50 annual fee, but that was quickly nixed.

McMillon said Jet's business model of encouraging shoppers to buy in bulk fits nicely with Wal-Mart's historical positioning as a place where people can stock up during one big trip. He added that Jet's pricing algorithm fits with its ethos of always offering the lowest prices.

"The customer is even more in charge of the price that they pay," he said. "There's really an empowerment there for customers that we like."

"We believe the acquisition of Jet accelerates our progress across [our] priorities," McMillon said. "Walmart.com will grow faster, the seamless shopping experience we're pursuing will happen quicker, and we'll enable the Jet brand to be even more successful in a shorter period of time. Our customers will win. It's another jolt of entrepreneurial spirit being injected into Walmart."

CNBC's Courtney Reagan contributed to this report