Jabong's makeover adds to its M&A appeal

Consolidation was projected to be the highlight for the Indian e-commerce industry in 2016, and the first big one is being scripted as the year crosses the mid-mark. Four-year-old Gurgaon-based fashion and lifestyle portal Jabong may be acquired in a deal valued at around $250 million, estimates suggest.

If the deal takes off, it will inevitably be compared to the other major acquisition in the fashion universe — Sachin Bansal and Binny Bansal-led Flipkart’s buyout of Mukesh Bansal’s Myntra for $300 million in May 2014. (None of the Bansals are related to each other.)

While Mukesh Bansal left the organisation earlier this year to start out on his own yet again, the Myntra effect has been positive on Flipkart as fashion is a fast growing online category with margins in the segment much higher than most other items, point out experts.

WHY JABONG IS A POTENTIAL TARGET
  • Profit margin in fashion is 10-15 per cent against 2-3 per cent in electronics
  • Jabong’s losses were down to Rs 46.7 crore in 2015 from Rs 159 crore in 2014
  • All major e-tailers want to be strong players in fashion to turn profits quickly
  • Indian e-retail could grow to $100 billion (Rs 6.7 lakh crore) by 2020, with fashion playing a strong role

Also, Myntra’s buyout by Flipkart prompted others to shop for fashion as well. Kunal Bahl-led Snapdeal acquired Exclusively.in, a high-end luxury fashion portal, last year for an undisclosed value. That wasn’t enough. The talk now is that Snapdeal wants to buy Jabong, the real challenger to Myntra, to grow its fashion business. Even Vijay Shekhar Sharma-promoted Paytm’s marketplace business is focused on the fashion category, and so is Shopclues.

The possible Jabong M&A deal is making news when investors have almost closed their purse-strings and fund-raising by e-commerce players is a rarity unlike a year ago.  Not surprisingly then, buyouts have been subdued in an industry that’s pegged to grow to $100 billion by 2020.

Although Jabong has dismissed the news as speculation, the e-commerce world is abuzz that the German incubator Rocket Internet-backed fashion portal has a long list of suitors—Snapdeal, Myntra, Aditya Birla group’s Abof, Future and Alibaba. It is learnt that both Rocket Internet and Swedish investment firm AB Kinnevik, which have a considerable holding in Jabong’s parent, Global Fashion Group, want to sell their stake.     

On the block on and off

That said, this is not the first time Jabong has been on the block. Last September, there was similar talk of a buyout. While Snapdeal seems to be the frontrunner now, its name had emerged as one of the hopefuls last year as well. Kunal Bahl, co-founder and CEO of Snapdeal, had then said, “Anytime anyone wants to look at raising money in this market or think about getting a strategic partner on-board, they come and talk to us.’’ This time around, reports have indicated that term sheets have been readied for a deal between Snapdeal and Jabong.

But as is the case for all deals, it is not done till it is announced. Soon after the buzz on Jabong being on the block last year, the management held back to back interviews at a central Delhi hotel to “give out the correct perspective’’.

In one such interview with Business Standard  in October, Nils Chrestin, then acting CEO of Jabong, said the company was getting ready for a makeover and that a new leadership team would be in place in the next two-three weeks. Jabong seemed in a hurry for the makeover because by the same evening, it had announced appointments of a new chief marketing officer, chief product officer and chief technology officer.

Chrestin, who’s also the chief financial officer at London-based Global Fashion Group,  which runs Jabong, said that by 2020, fashion would constitute 40 per cent of the estimated $100 billion e-commerce market in India and Jabong would be at the forefront in the segment. Would that mean Jabong would still be a part of GFG, which operates in 28 geographies around the world, in 2020? Chrestin had replied, “Who knows what could happen in five or 10 years?” But he had added India has the potential to be a long-term destination for Jabong’s parent company, GFG.  

While reports had said that Jabong could not be sold last year because of valuation mismatch (asking price was $500 million and there weren’t any takers at that value), Chrestin’s reply had kept things open-ended.

Meanwhile, things have been in a flux. Last year, Jabong was brought under the GFG fold, along with other fashion e-tailers from Latin America, Russia, Australia, West Asia and others. Subsequently, several co-founders, including Praveen Sinha and Arun Chandra Mohan, left the company. Reports suggest that the current CEO Sanjeev Mohanty, who was appointed last year, is on his way out too. He is likely to join Levi’s as India head.

A growth story

In the midst of all the changes and uncertainties, what is making Jabong a potential candidate for acquisition is its financial turnaround. Jabong’s Ebitda (Earnings before income, taxation, depreciation and amortisation) losses, for the first six months of 2015, had grown 46 per cent to Rs 227.4 crore compared to Rs 55 crore a year ago, Chrestin told this newspaper last year. He had added that the focus in the future would be on profitability along with growth. And Jabong has walked the talk.

Jabong achieved breakeven in the last quarter and plans to become profitable by mid-2017. In the first quarter of this year, the company posted Rs 244 crore revenue, an increase of 14 per cent from last year. Its gross loss is down to Rs 46.7 crore in 2015, from Rs 159.5 crore in 2014, as it reduced discounts on the site.

Jabong is not alone in shifting focus on profits. Myntra is targeting profits next year; others are actively pursuing profitability as well as investors are getting impatient with losses. As Snapdeal’s Bahl in a recent interview to another publication put it, “GMV (gross merchandise value) is so 2015 and profits are the way to be.”

The shape of the e-commerce market is clearly set for a change. Amazon is pouring whatever it takes to be a winner as it battles it out with Flipkart in India. In addition to its $2 billion investment in 2014, it recently announced another $3 billion for India. Meanwhile, Chinese major Alibaba is preparing to enter India for direct play in internet-led commerce. Even Indian business houses, including the Ambanis, Tatas and Birlas, are gearing up for a bigger slice of the online pie, making everyone look closely at their financials.

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