Snapdeal calls off merger

E-commerce company, Snapdeal has terminated talks of a merger with its rival Flipkart.

The deal was reportedly worth somewhere between $900-$950 million and has been in works for at least six months.

Background

Both Snapdeal and Flipkart are e-commerce companies based in India. Flipkart is the more successful business with a larger market-share.

The e-commerce industry in India in 2016, was worth around $14.5 billion. In 2015, it grew an impressive 180% to become a $13 billion industry. The growth rate in 2016 had slowed down to 12%.

As early as August 2016, rumors started surfacing that Snapdeal was considering merging with larger giants like Amazon and Flipkart. It had been struggling to raise capital and at the behest of one of its investors, Japan’s SoftBank Group Corp, it began engaging with Flipkart. Before official talks began regarding the merger, Snapdeal embarked on a rebranding exercise and significantly slashed its workforce. During peak valuation at February 2016, Snapdeal was said to be worth $6.5 billion but when the talks officially commenced, its worth was placed at $1 billion.

Analysis

Only a week ago the company’s investors, SoftBank and Nexus Venture Partners agreed to negotiate with Flipkart on its revised offer of $900 million. The breakdown reportedly occurred due to disagreements Snapdeal founders had with SoftBank and because of some of the clauses put forth by Flipkart, which it deemed unworkable.

The company has just agreed to sell its payments unit called Freecharge to Axis Bank. The deal was reportedly for Rs 385 crore. This money also gave Snapdeal a chance to chart its own independent path. In a statement it has said, “Supporting entrepreneurs and their vision and aspirations is at the heart of Masayoshi Son's and SoftBank's investment philosophy. As such, we respect the decision to pursue an independent strategy. We look forward to the results of the Snapdeal 2.0 strategy, and to remain invested in the vibrant Indian e-commerce space.”

It is currently the third biggest e-commerce platform in India. The company is hoping to sell its logistics business, Vulcan Express, to raise an additional Rs 100-120 crores.

Assessment

Our assessment is that it is extremely difficult to value companies such as Flipkart or Snapdeal. Much of the fate of such companies is tied to the growth of e-commerce industry in India. As of 2016, Indian retail consumer spending had jumped to $750 billion and internet penetration was at 40%.