Valuation to too many demands: Why Snapdeal-Flipkart merger is dragging

After five months of discussions, the Snapdeal-Flipkart merger has turned into the most complex acquisition negotiation.
In the universe of Snapdeal and Flipkart everyone is hopeful, but of different things. Japanese telecom giant SoftBank and US hedge fund major Tiger Global are hopeful of merging the two e-commerce players. Snapdeal’s board members, such as Nexus Venture Capital, and smaller shareholders are hopeful of a better-valued exit, and the co-founders Kunal Bahl and Rohit Bansal are hopeful of holding on to their company.

The clash of hopes is what has kept the ‘biggest consolidation in Indian e-commerce history’ from becoming a reality. After five months of discussions, the Snapdeal-Flipkart merger has turned into the most complex acquisition negotiation.

Stonewalling deal

In his last email to FreeCharge employees as the top boss, Bahl, buoyed by the sale of the mobile wallet to Axis Bank, said the deal provides them the necessary boost in resources to continue the journey towards building an e-commerce platform.

Axis Bank last week announced it had bought the mobile payments wallet provider from Snapdeal for Rs 385 crore ($60 million). 

According to sources close to Snapdeal, the co-founders are actively working towards a ‘Plan B’ and have taken into confidence most of their senior management. According to sources, the two have been fighting SoftBank, the biggest investor in the company, 'tooth and nail’ to prevent the deal from happening.

“They are going to fight the deal till they can. The kind of U-turn SoftBank took last year has left them flabbergasted. First SoftBank asked them to rebrand, spend money on marketing, promising all along that more investments are on way and then they suddenly left them high and dry. While Flipkart went through a series of markdowns, Snapdeal was untouched, but when it came to valuing the company for a merger, its valuation was slashed from $6.5 billion to less than a billion dollars,” said a source who till recently was part of the Snapdeal senior management.

Bahl along with Bansal and Jason Kothari, the current chief executive officer of FreeCharge, have been in talks with several other players in hopes of finding an alternative to Flipkart. Recently, the founders were having informal talks with business-to-business marketplace major Infibeam, though the talks have not moved forward.

If push comes to shove, the co-founders plan to bring down the number of employees from 1,000 to 200, run a lean organisation, and show profits by next year. It plans to go for an initial public offering post that and get an exit.

Valuation woes

Till date, the co-founders as well as Snapdeal’s early-stage investors have been upset with the way SoftBank has marked the valuation to a sixth of what it was last year. Kalaari Capital and Nexus Venture Partners, the two early-stage investors, wanted SoftBank to value not just the e-commerce company, but its two units — Vulcan Express and Unicommerce — with a higher valuation.

Both Kalaari and Nexus had vetoed SoftBank’s proposal in April to value the e-commerce company between $600-800 million. SoftBank has already written off the value of its investments in the company.

In the months that followed, Kalaari’s founder Vani Kola resigned from the Snapdeal board and Nexus gave its assent to the valuation of a billion dollars. Flipkart that earlier made an offer of $750 million, revised it to $900 million. But the co-founders and Nexus are still playing hardball on it. “The investors believe that Snapdeal is worth more and do not want to be shortchanged. They have to face their shareholders,” said a source close to the Snapdeal board.

Snapdeal’s minority shareholders, in total around 30 including PremjiInvest, have also showed their displeasure about the deal and are all demanding a better payout. It is important that shareholders agree to the deal, as this is part of the clauses set by Flipkart for the merger to go through.

Flipkart’s demands

From indemnity to a non-compete clause, Flipkart has put forth a set of demands in front of the Snapdeal board that is making them as well as the shareholders of the Gurugram-based online marketplace ‘uncomfortable’, and leading to further delay.

“There are a lot of non-standard clauses that Flipkart wants Snapdeal board to agree on. For example, the marketplace major wants indemnity for at least two years for any financial losses or other troubles that might happen post merger,” sources close to Snapdeal board said.

It means Flipkart wants protection from all the decisions taken by Snapdeal board that might have an effect on the company post merger for a period of two years. Snapdeal investors, such as Nexus, Kalaari and others, who are looking for an exit would remain tied up for a considerable amount of time.

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