The winners and losers in Snapdeal’s $950 million sale to Flipkart

Jayadevan PK April 10, 2017

Online retailer Flipkart is close to signing a deal to acquire smaller rival Snapdeal at a valuation of $950 million, forcing many Snapdeal investors to take a haircut and giving Japanese conglomerate and the biggest investor in the company Softbank a firmer toehold in India’s consumer internet space.

Nexus Venture Partners, which owns nearly 10% in Snapdeal, is likely to be the worst hit.

“A sale at about $950 million would mean the returns are just over 50 cents to a dollar,” a top investor pointed out. Delhi-based Snapdeal raised close to $1.7 billion from investors.

The deal, driven by Softbank, has been in the news with multiple media outlets reporting on it. Negotiations are still on and the companies are yet to make an announcement. Talks between Snapdeal’s investors and Flipkart took a serious turn last week.

Softbank wants to sell Snapdeal to Flipkart and also buy up additional shares from Tiger Global (an early Flipkart backer) to have a significant holding in the company. For Softbank, whose Indian investments haven’t really paid off, this deal is a silver lining.

Also see: The backstory of how Snapdeal pivoted and pivoted — and then lost the plot

While Snapdeal founders Kunal Bahl and Rohit Bansal, investors Bessemer Venture Partners, Kalaari Capital, Saama Capital and eBay made handsome returns by selling part of their stakes in previous rounds to larger investors like SoftBank and Ontario Teachers’ Pension Plan (OTPP), some investors are at the losing end of the bargain.

OTPP, Luxembourg-based Clouse SA,and Hong Kong’s Brothers Fortune Apparel invested in Snapdeal at a peak valuation of $6.5 billion and this sale could significantly hurt the value of their investment. OTPP has assets worth $155 billion under its management. These investors don’t have any voting rights in the company.

In venture capital circles, the buzz is that the biggest loser in this deal will be Nexus Venture Partners. “They went all in and never sold. It’s good to have conviction but sometimes (it is) foolhardy,” said a top investor who requested not to be named. A top executive at an ecommerce firm said, “They either got greedy or blinded.”

Source: Mint, Company Filings.

Nexus owns nearly 10% in Snapdeal and is reportedly asking for a $100 million payout from Softbank if it is to approve the deal. (Nexus would have made a tidy sum if it had made a partial sale at the time Snapdeal was valued at $6.5 billion). Tata Group’s chairman emeritus Ratan Tata had also made an undisclosed investment in Snapdeal in 2014 when the company was valued at close to $1 billion — it’s not clear how his investment gets affected.

We’ve emailed Flipkart, Snapdeal, Nexus, and Softbank for comments.

Meanwhile, many Snapdeal employees are likely to be affected by this transaction. Employees fear that their jobs might be at stake here. In an email to Snapdeal employees on Sunday, Snapdeal founder Kunal Bahl said: While our investors are driving the discussions around the way forward, I am reaching out to let you know that the well-being of the entire team is mine and Rohit’s top and only priority. The company had laid off nearly 600 employees in February to cut costs.

For Flipkart, a deep-pocketed investor like Softbank will be useful in its fight against Amazon.

“The only value Flipkart sees in this deal is Softbank coming on board,” said the investor cited above. “The old santa is too old,” he said referring to Tiger Global, which is trying to exit its India investments as its fund reaches maturity.

Flipkart, which has already raised $1 billion from Chinese internet giant Tencent, eBay and Microsoft, is looking to close the round at $2 billion with additional funding from Softbank. It is also likely to acquire eBay’s India operations, FactorDaily reported last month.

Freecharge, a recharge and payments company that Snapdeal acquired for a reported $400 million in 2015, is likely to be sold as a separate entity. “The asking price is $100 million,” said a source. However, according to another source, transactions on Freecharge have declined to three-four lakhs per day whereas its bigger rival Paytm is clocking eight million transactions a day. Freecharge’s plan to onboard offline merchants to accept payments through its platform has also not taken off.

As we’d reported earlier, Alibaba was also in talks to buy Snapdeal but those talks never went far because the Chinese e-commerce company’s offer was “too low”.

Meanwhile, under a new leadership, Flipkart has started hiring again. Kalyan Krishnamurthy, who took over as Flipkart’s new Chief Executive Officer, is said to be hiring for top level positions.

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