Exclusive: Snapdeal explores merger talks with Flipkart, Amazon

Snapdeal, India's second-largest homegrown online retailer, has initiated preliminary talks with staunch rivals Flipkart and Amazon to explore a possible merger that could realign the country's e-commerce industry.

Two people directly aware of the development said that Snapdeal is open to a merger with either Flipkart or Amazon, India's and the world's largest e-commerce companies, respectively, and that the move is at an exploratory stage.

A third person said Snapdeal co-founder Kunal Bahl had met with top executives of Tiger Global Management, the US-based hedge fund giant and the largest investor in Flipkart, presumably to discuss the issue.

"Only feelers have been sent (to the prospective buyers)… the discussions have not reached the asking price stage," said one of the two people cited above. "The Flipkart board has not formally discussed the proposal," said the other. All three declined to be named given the sensitivity of the issue.

Both Flipkart and Snapdeal, run by Jasper Infotech Pvt. Ltd, have denied holding any talks.

"This is completely false and baseless," a Flipkart spokesperson said in response to email queries from VCCircle.

A Snapdeal spokesman said the company has had no such discussions with anybody at any point in time. "Your so-called 'news' is baseless and we categorically deny this speculative, unfounded story," the spokesman said.

A spokeswoman for Tiger Global said the firm had no comment to offer. Amazon didn't respond to an email seeking comment till the time of filing this article.

SoftBank's support

Snapdeal reaching out to rivals is being seen as a likely fallout of a sensational top-level change at SoftBank Group Corp, one of Japan's largest telecommunications and Internet companies and the largest investor in the Indian e-commerce company.

In June, Nikesh Arora, the then president and chief operating officer at SoftBank and the heir apparent to chairman Masayoshi Son, stepped down in a surprise move that came after Son decided to remain at the helm of the company he had founded for a few more years.

Arora had led SoftBank's investment in a clutch of Indian startups, including Snapdeal, and also reportedly invested himself in some of them. Arora had faced allegations related to conflict of interest and poor business decisions from a group of SoftBank investors but the Japanese company had given him a clean chit. His sudden departure had triggered speculation about SoftBank's plans for India though the company had said it remained committed to the country

SoftBank holds a significant minority stake in Snapdeal. It had led a $627 million round of investment in the company in late 2014 followed by another round of $500 million last year.

In total, Snapdeal has raised around $1.65 billion from about two dozen investors. These include SoftBank and SoftBank-backed Chinese e-commerce company Alibaba, Taiwanese contract electronics manufacturer Foxconn, global online marketplace eBay Inc., Indian media company Bennett Coleman & Co. Ltd, and venture capital investors such as Bessemer Venture Partners, Intel Capital, Iron Pillar, Kalaari Capital and Ratan Tata.

Snapdeal is estimated to have cash reserves to sustain itself for one year without any additional fundraise. But one of the persons cited above said that Tokyo-based SoftBank's future support to Snapdeal is "under doubt", prompting the Indian company to explore other options.

SoftBank didn't respond to an email seeking comment till the time of filing this article. However, the company has recently invested more money in two of its India portfolio companies, hotels aggregator Oyo Rooms and mobile messaging app Hike.

Under pressure

Snapdeal, Flipkart and other Indian e-commerce firms spent heavily on discounts and marketing over the past few years as they focused on building a strong customer base before working toward profitability. This widened losses at the top e-commerce companies.

But investors are now increasingly looking for profitable growth and have tightened the purse strings. That has forced companies to preserve cash and cut costs by scaling down operations and trimming the workforce. Many consumer Internet companies are also looking at consolidation and strategic sales to survive.

The Economic Times, citing unnamed sources, reported in March that Flipkart had considered selling itself to Amazon and conversations carried on till as recent as the last quarter of 2015. On Thursday, the newspaper reported that China's Alibaba Group had held talks to acquire e-commerce company Shopclues. Alibaba already has a stake in Snapdeal and mobile wallet and e-commerce firm Paytm but is stepping up efforts to establish a direct presence in Indian e-tailing market. Alibaba had held talks to invest in Flipkart also earlier this year and the Chinese firm's role in the evolving scenario will be critical.

Both Snapdeal and Flipkart have been trying to raise more funds. On the other hand, their deep-pocketed rival Amazon is rapidly growing in India. Billionaire Jeff Bezos-led Amazon in June decided to invest $3 billion more in Indian operations, taking the total earmarked so far for the country to $5 billion.

Snapdeal last raised funds early this year when it received $200 million from Canada's Ontario Teachers' Pension Plan and other investors. This round valued Snapdeal around $6.5 billion. That's less than half the $15.2 billion valuation of Flipkart when the company last raised funds in 2015.

However, Flipkart's valuation has been under pressure with six US-based mutual funds marking down the value of their stake in the company this year. Two of the six investors have increased the value of Flipkart's shares in recent months, though the company's estimated valuation remains far below last year's peak.

Flipkart has so far raised around $3.2 billion and Tiger Global is its lead investor. Tiger Global first invested in Flipkart in 2009 and is estimated to have put in around $1 billion in the company.

Snapdeal has also been trying to cut costs and focus more on profitability. The pressure on Snapdeal is evident also from two recent developments. The company has shut down Exclusively.com, a marketplace for premium branded fashion and lifestyle products, about 18 months after acquiring the startup. Separately, it has been in talks with several investors, including Foxconn, to sell a stake in its payments unit FreeCharge. Snapdeal had acquired FreeCharge in early 2015.

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