A $1 billion buyout of struggling online marketplace Snapdeal by Flipkart may yield more immediate benefits to Tiger Global Management, Flipkart’s largest investor, than to the buyer or to Indian consumers.
The buyout is being arranged by Tiger Global managing director Lee Fixel and SoftBank Group Corp., which count Flipkart and Snapdeal as their largest holdings, respectively. The deal may see SoftBank buy some of Tiger’s holdings in Flipkart and put additional cash into the company, said two people familiar with the matter.
The proposed deal seems like a desperate attempt at financial engineering by the country’s two most influential start-up investors, which have seen their bets falter to differing degrees over the past 15 months (SoftBank’s a lot more so than Tiger’s).
Flipkart’s Snapdeal acquisition is being arranged by Fixel and SoftBank and might see the latter pick up some stake India’s largest e-commerce firm
SoftBank is desperate to salvage what it can of its $900 million investment in Snapdeal, which accounts for nearly half of all the cash it has invested in Indian start-ups; the Japanese firm’s eagerness to exit the online retailer, once valued at $6.5 billion, is matched by Fixel’s need to take some cash out from Flipkart. Fixel needs some returns after having pumped more than $2 billion into Indian start-ups since 2010. Roughly half that amount went to Flipkart, his prized bet on which he has staked his reputation and his job.
However, though a deal makes sense for Fixel and SoftBank, it will be tough for Flipkart to extract meaningful benefits from a buyout of Snapdeal, analysts and investors said. Flipkart already faces steep odds in holding off Amazon India, which is running neck and neck with its local rival at the top of India’s $14-15 billion e-commerce market.
“It’s a double-edged sword for Flipkart,” said Rutvik Doshi, managing director at Inventus Capital, a venture capital firm. “Absorbing Snapdeal will be very, very challenging and will likely turn out to be a big distraction for the management team. But then, Flipkart would also be getting SoftBank as an investor which may prove to be significant over the long term.”
That’s said to be the primary attraction of the deal for Flipkart—getting SoftBank on its investor roster. SoftBank, the world’s largest start-up investor, is best known for being an early backer of China’s Alibaba Group; SoftBank’s initial investment of $20 million turned into a stake worth more than $60 billion when Alibaba listed its shares in 2014. SoftBank announced a $100 billion fund for start-up investments late last year.
“It’s (Snapdeal acquisition) a double-edged sword for Flipkart. Absorbing Snapdeal will be very, very challenging and will likely turn out to be a big distraction for the management team. But then, Flipkart would also be getting SoftBank as an investor which may prove to be significant over the long term”- Rutvik Doshi, managing director at Inventus Capital
Even so, Flipkart is well funded. The company has more than $2 billion in cash after raising $1.4 billion last week; it has slashed spending over the past year and has publicly said it will reduce costs further; it wants to list its shares rather than raise more money; and even if it does require more capital before an IPO, its existing investors have no shortage of cash.
From an operational perspective, a deal makes little sense for Flipkart.
After slashing costs earlier this year, Snapdeal’s monthly sales fell to less than Rs400 crore, said two other people familiar with the firm’s sales. That’s even lower than the average monthly sales at Flipkart-owned fashion retailer Myntra, the people said.
India’s e-commerce market has cooled significantly, indicating that there’s no room for more than two or three large e-commerce firms. Flipkart, which is already trying to absorb eBay India’s business after agreeing to buy it earlier this month, may be taking on more than what it can handle by buying Snapdeal at a time when it hardly needs distractions.
Given this scenario, does Tiger need SoftBank more than Flipkart?
“When you’re fighting Amazon, $1.4 billion suddenly doesn’t seem that much,” said Sandeep Murthy, managing director at venture capital firm Lightbox Ventures. “I’d say that getting SoftBank as an investor is worth risking the distraction of a distressed asset (like Snapdeal). In a fight with Amazon, the kind of long-term capital that SoftBank offers may prove to be very useful.”
“Getting SoftBank as an investor is worth risking the distraction of a distressed asset (like Snapdeal). In a fight with Amazon, the kind of long-term capital that SoftBank offers may prove to be very useful”- Sandeep Murthy, MD at Lightbox Ventures
Mint reported last month that Snapdeal is in talks with both Flipkart and Paytm for a potential sale after it failed to raise fresh capital. Currently, a deal with Flipkart looks more likely though it hasn’t been finalized.
What helps Tiger and SoftBank is that both are firmly in control of matters at Flipkart and Snapdeal, respectively.
Since January, Fixel has established a strong hold over Flipkart by replacing co-founder Binny Bansal with Kalyan Krishnamurthy as chief executive of India’s most valuable Internet firm. Krishnamurthy, a former managing director at Tiger, had led the turnaround efforts at Flipkart after rejoining the company last June.
On the other side, SoftBank, too, is primarily determining the course of Snapdeal, whose co-founders have admitted that the company’s fate is out of their hands.