What does the merger with Blinkit mean for Zomato and its shareholders?

Industry:    2022-03-21

Less than a year after investing $100 million in Blinkit for a 9.3% stake, Zomato is reportedly in talks to merge with the online grocery company in an all-stock deal. Blinkit shareholders will get a 10% stake in Zomato.

Business Standard report said that Blinkit would be valued at around $750-800 million dollars, which is much lower than the unicorn status it had achieved last August with the funding round where Zomato participated.

Blinkit is going through a severe cash crunch, bringing the unsustainability of the quick commerce model into focus even as competition is increasing in this space. This has prompted Zomato to extend a $150 million loan to Blinkit to support its capital requirements in the near term.

The loan amount is in line with Zomato’s stated intent of investing up to $400 million in quick commerce in India over the next two years.

Formerly called Grofers, the start-up rebranded into Blinkit in December as it pivoted to 10- minute grocery delivery, entering the quick commerce segment.

So, what is behind Zomato’s plan to acquire Blinkit?

Zomato has become a strategic investor in the hyper-local e-commerce segment and has picked up stakes in smaller start-ups. While Zomato says its core food-related businesses that include food delivery, dining-out and B2 supplies unit Hyperpure will remain its key focus, it wants to invest in building the ecosystem around the food delivery business so that the cost of running a better food delivery business goes down with time.

In the past year, it has made cash investments worth $225 million in Blinkit, Shiprocket and Magicpin towards its objective of building out quick e-commerce in India.

However, Zomato is still a loss-making company.

While its Average Order Value has increased over the last three years to Rs 400, in Zomato’s own words, the food delivery business is only showing early signs of maturity.

Its contribution margin as a percentage of the Gross Order Value is 1.1%, although this is an improvement from negative 15% in 2019. Zomato estimated that a 5% contribution margin in its food delivery business at the current scale can ensure break-even at the EBITDA level. Moreover, Zomato will continue to fund the growth in its core food businesses till they become profitable.​​

Zomato has previously said it stands ready to infuse additional capital into the hyperlocal e- commerce companies in which it has taken minority interest, and consolidate its stake, leading to a potential merger in the future. However, the quick timeframe between Zomato’s first investment in Blinkit and the potential merger has raised eyebrows. This could also mark the beginning of the consolidation in India’s ultrafast grocery delivery space.

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