What if Flipkart-Snapdeal merger deal falls through?

In March last year, Sachin Bansal, co-founder of India’s biggest e-commerce company Flipkart, tweeted: “Alibaba deciding to start operations directly shows how badly their Indian investments have done so far." No prizes for guessing that the dig was aimed at rival Snapdeal.

“Didn't Morgan Stanley just flush 5 billion worth market cap in Flipkart down the toilet. Focus on your business, not commentary,” pat came the riposte from Snapdeal co-founder Kunal Bahl.

Cut to the present, and the two arch-rivals are trying to stitch what's hitherto the biggest merger deal in Indian e-commerce.

Last week, however, the talks hit a speed bump after the Snapdeal board rejected Flipkart's initial buyout offer of $700-800 million. A person aware of the development had told VCCircle that the exclusivity period for Flipkart to conduct due diligence had ended, opening avenues for Snapdeal to look for other suitors.

What if the deal comes unstuck?

Experts are divided on Snapdeal's future should the deal fail to materialise.

“If Flipkart pulls out, a lot will depend on how Snapdeal's existing investors respond. It will also depend on the equation between the investors as the deal was primarily driven by Softbank, the largest investor in Snapdeal that is looking to hold a stake in the combined entity. However, given the investors have supported the company so far, they are likely to continue supporting it. They may ask the founders to rebuild Snapdeal, and explore other exit options in future,” says Devendra Agrawal, founder of investment bank Dexter Capital.

However, not everyone feels investors would bet more money on the troubled e-commerce firm given it hasn't proven to be a breakout investment thus far.

“I don’t think they have too many options. The discussions are not going on with promoters, but between various investors. Everyone is trying to minimise their exposure and manage their losses. Besides, I haven’t heard about anyone else making an offer for Snapdeal. It needs a saviour, a white knight," Arvind Singhal, chairman and managing director at consulting firm Technopak, said.

"I don’t buy this $750-850 million [issue]. Maybe they [Flipkart] don’t have interest [in buying Snapdeal]. Anyway, the numbers are not confirmed by either company," he added.

What happens to the impending SoftBank-Flipkart deal?

SoftBank, which has pumped nearly $900 million into Snapdeal, holds two seats on the company's board while Nexus and Kalaari hold one each.

“SoftBank wants to invest $1 billion or so [in Flipkart], but Flipkart doesn’t want to offer $800 million [for Snapdeal]. SoftBank has already lost a lot of money. It's not clear to me as to why they would want to invest this kind of money again. If the deal doesn’t go through, it's unlikely that SoftBank will invest in Flipkart. If somebody would want to invest in Flipkart, it's Alibaba,” Singhal explained.

Hence, given the high stakes involved—the fund infusion in Flipkart is incumbent upon it buying Snapdeal—it is unlikely that India's biggest e-tailer will pull out of the deal.

Other suitors

Serial entrepreneur and investor K Ganesh feels Snapdeal won't find a lot of takers.

The company's other investors include SoftBank-backed Chinese e-commerce company Alibaba, Taiwanese contract electronics manufacturer Foxconn, e-tailer eBay Inc., media company Bennett Coleman & Co. Ltd, and venture capital investors such as Bessemer Venture Partners, Intel Capital, and Ratan Tata.

Anup Jain, managing partner at retail consulting firm Redback Advisory Services, agrees with Ganesh: “Snapdeal does not have many options. As a marketplace, the entire brand value is built around unique transactions and unique users versus biggies like Amazon and Flipkart. If the impasse continues, it will have to find a new suitor like Paytm, which is building itself as a marketplace around its wallet offering. Or it will have to curb its burn without letting its transactions or user base getting affected."

The deal has been facing hurdles for a while now. Earlier, Snapdeal’s early investors Nexus Venture Partners and Kalaari Capital were opposed to SoftBank’s offer to invest in the e-commerce firm and its mobile wallet subsidiary FreeCharge as it would have valued Snapdeal at $1 billion, a far cry from its peak valuation of $6.5 billion. The offer would have increased SoftBank’s stake in the e-commerce firm, while reducing that of Kalaari and Nexus. (Here's how much Kalaari and Nexus are likely to reap from the merger deal.)

Paytm in contention

Digital wallet and e-commerce company Paytm looks like a potential contender should Flipkart withdraw.

“Snapdeal can speak to Paytm since they have Paytm Mall. It can also talk to foreign players trying to enter India, such as Japanese players like Rakuten or Chinese players. But these will be top-of-the-funnel discussions. As discussions go deeper, players become fewer. And it becomes difficult to go up the funnel and start talking to multiple players again. The likely outcome would be a renegotiation of terms with Flipkart, and making the deal happen,” adds Ganesh.

Jain concurs. “Only Paytm has the desire and the deep pockets to be an interested suitor,” he says.

Offline buyer?

The world's biggest retailer Walmart, which operates wholesale stores in India based on the cash-and-carry format, and India’s Future Group or even Reliance Industries could be potential suitors for Snapdeal. Neither of these companies have a solid online presence, and getting access to Snapdeal's e-tailing infrastructure and seller base could be a shot in the arm for them.

PremjiInvest, the family investment arm of Wipro Ltd chairman Azim Premji, and media firm Bennett, Coleman and Co Ltd have invested in both Snapdeal and Future Group.

The poison pill

In merger and acquisition parlance, it is a strategy employed by a company to make itself unattractive when presented with a not-so-welcome buyout bid. But, as seen in the AskMe fiasco, everyone stands to lose in such a scenario.

Can Snapdeal get its act together?

This might be the toughest option for Snapdeal—go back to the basics, cut costs and embark on the path to profitability.

“Snapdeal would need to rebuild the team, get traction back and, most important, revive confidence. However, Kunal and Rohit have steered the company in the past, including multiple pivots. They can still take it ahead subject to support from stakeholders. If they can do this, Snapdeal may have alternative exit options in a few years,” says Agrawal.

Jasper Infotech Pvt. Ltd, which runs Snapdeal, saw its consolidated loss widen to Rs 3,315 crore in FY2015-16, which means it lost Rs 9 crore every day. Consolidated loss for FY2014-15 stood at Rs 1,328 crore. Total revenues in FY2015-16 went up 56% year on year to Rs 1,456.6 crore. The company had garnered revenues of Rs 933.3 crore in the previous financial year, according to filings with the Registrar of Companies.

Sanchit Vir Gogia, founder of consultancy firm Greyhound Knowledge Group, says, “Microsoft wanted to buy Yahoo, but Yahoo rejected the offer and it was only downhill from there. Valuations came down. It is important for a company to take the right decision at the right time. Snapdeal should not do the same. If they refuse now, there is no other possible suitor.”

Another episode Snapdeal would do well to remember is Flipkart’s acquisition of fashion e-tailer Jabong. In late 2014, Jabong was seeking a valuation of around $1.2 billion for a potential sale to e-commerce major Amazon. However, the talks fell through over a valuation mismatch. Eventually, in July 2016, it was sold to Flipkart for a lowly $70 million.