Snapdeal, Flipkart call off merger talks

Image: Anindito Mukherjee/ Reuters

It’s official. Talks between ecommerce firms Snapdeal and Flipkart for a proposed merger have been called off. A Snapdeal spokesperson said, "The company has now decided to pursue an independent path and is terminating all strategic discussions as a result."

It is understood that founders Kunal Bahl and Rohit Bansal have gone back to the drawing board to chart out a revival of sorts for Snapdeal that may see them slashing a majority of the workforce. The headcount of the company currently stands at 1,200 people. Sources say the founders are looking to slash as many as 1,000 jobs.

The alternate plan called Snapdeal 2.0, is likely to see a leaner Snapdeal operating a platform connecting buyers and sellers, sans additional services such as logistics.

In an email to employees on Monday, which was reviewed by Forbes India, Bahl and Bansal noted that the sale to Flipkart was “incredibly complex to execute”. They claimed that Snapdeal had clocked gross profit and is on course to clock gross profits of Rs 150 crore in the next one year, and did not need capital beyond the FreeCharge sale proceeds to run operations. Gross profit is revenue minus cost of goods sold and does not take into account fixed costs such as employee salaries, rent, advertising etc.

“With the ongoing streamlining of costs and sale of some of our assets, such as FreeCharge, we are financially self sufficient as a company and don’t need to raise additional capital to reach profitability.  Needless to say, we will need to keep a tight control on our costs and work towards becoming a hyper efficient culture delivering profitable growth, month on month,” the founders wrote in the email.

Forbes India was the first to report the development in its online edition dated July 27, 2017 that Bahl and Bansal were not keen on the deal, and that with FreeCharge's (its wholly owned payments subsidiary) sale to Axis Bank, the transaction may hit a roadblock. For the past few months, Snapdeal has been openly holding meetings with key executives within the organisation to devise an alternate plan in case negotiations with Flipkart fall apart.

"Snapdeal has been exploring strategic options over the last several months.…… With the sale of non-core assets, Snapdeal is expected to be financially self-sustainable," the etailer's spokesperson said in a statement. “Snapdeal’s vision has always been to create life-changing experiences for millions of buyers and sellers across India. We have a new and compelling direction – Snapdeal 2.0 – that uniquely furthers its vision, and have made significant progress towards the ability to execute this by achieving gross profit this month.”

Snapdeal expects that the proceeds from the sale of FreeCharge to Axis Bank amounting to about $60 million will keep the company afloat for the time being, until it secures a fresh round of investment from new or existing investors.

News pertaining to Snapdeal-Flipkart merger first came to light in April this year (Forbes India was the first to break the news). The former was put on the block by SoftBank, its largest shareholder with about 33% stake, about five months ago. Larger rival Flipkart emerged as the front runner to lap up the beleaguered company for $850-950 million in an all-stock deal. According to sources, the primary driver for Flipkart was to secure fresh funds-to the tune of $500 million-from SoftBank, and secure a partial exit for its largest stakeholder Tiger Global Management.

It is understood that Ahmedabad-based online retailer Infibeam had also made an offer for an all-stock acquisition, valuing Snapdeal at about $700 million.

The deal had met multiple hurdles with smaller stakeholders – Snapdeal has more than 20 of them – opposing special payouts to the larger shareholders such as Kalaari Capital and Nexus Venture Partners, which holds about 7 percent and 9 percent in the company, respectively. As part of the deal, Kalaari was expected to get a payout of about $30 million and Nexus about the double of that. The likes of Premji Invest had opposed the deal.

The talks were eventually called off after the shareholders failed to arrive at a consensus on payouts and the terms of the deal, which included the Snapdeal board being accountable for representations of the company's finances and structure to Flipkart.

It is not immediately clear if Snapdeal’s early investors will continue to back the company or look to cash out. SoftBank, however, said it will stay invested in the company for now.

"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 remaining invested in the vibrant Indian e-commerce space," a SoftBank spokesperson said in an email.

SoftBank, which recently floated a $100-billion fund, has been trying to recoup its investments in India, especially in the likes of Snapdeal and online real estate firm Housing.com, which was eventually sold to News Corp-backed PropTiger. Some of SoftBank’s other investments in India include budget hotel aggregator Oyo and ride hailing company Ola.

Snapdeal, which was once the second largest e-commerce company in India, after Flipkart was pushed out of the race by Seattle-headquartered Amazon’s India arm, which literally outspent Snapdeal to occupy the second spot. While Flipkart, which recently raised $1.4 billion from Microsoft, Tencent and eBay, along with its subsidiaries Myntra and Jabong is a leader. Amazon is a close second.

Experts say that trouble for a revamped Snapdeal could be far from over, as the company is expected to resort to job cuts. Forbes India reported on July 27 that Snapdeal plans to let go about 1,000-odd executives and run with a 200-member team. “We knew the deal will not go through, the founders used to openly tell us in meetings that they will not let the transaction fructify,” said a Snapdeal employee on the condition of anonymity.

"They are now meeting senior executives to figure out a way forward and prepare a structure for a leaner Snapdeal. Until now, there was hope on employees getting a payout with the Flipkart acquisition. While some of the FreeCharge executives have got handsome payouts, the fate of Snapdeal employees is unclear," the aforementioned person added. Some of these employees were held back some months ago to keep the work going in Snapdeal.

Going forward, Snapdeal would need to match the spending prowess of Amazon and Flipkart. Amazon, especially, has been aggressive with a $5-billion war chest for India. Under such circumstances, the jury is out on Snapdeal’s chances of survival after it exhausts the proceeds of the FreeCharge sale.

"The company has significantly reduced cash burn to less than $10 million a month. But less spends on advertisements and discounts also erodes customer base, something that happened to eBay in India (eBay’s India operations were eventually bought by Flipkart). Snapdeal could be in the market to raise funds soon,” a person in the know said on the condition of anonymity.