Snapdeal-Flipkart deal: Will the board manage to convince Nexus today?

Cash-starved Snapdeal may finally be up for sale. The board of online marketplace Snapdeal is expected to meet on Tuesday to discuss a potential sale to larger rival Flipkart. If all the roadblocks are cleared, this will be the biggest consolidation in the e-commerce sector. Snapdeal launched in 2010 as a discount deal site. In 2011, it evolved into an online marketplace, inspired by Alibaba. However, its success story was short lived and it has now embraced for a painful death as its evaluation sinks lower and lower with time.

Hurdles for Snapdeal

One of the main hurdles to the deal will be 'valuation of Snapdeal'. In its last funding round in February 2016, Snapdeal was valued at $6.5 billion. The valuation, however, has shrunk since then and the potential deal could be struck at a discounted rate, say industry watchers.

Initial talks in the ongoing merger deal indicated that the Snapdeal valuation was pegged at lower than $1 billion, even as it was valued at $5 billion in August 2015, when it raised $500 million from a consortium of Alibaba, SoftBank and Foxconn. The company’s valuation had peaked last February at $6.5 billion when it raised $200 million from Ontario Teachers’ Pension Plan and others.  

Snapdeal, in an emailed response, said while the board had access to the data, it had not given the information to outsiders, as there was no such direction from the e-commerce company’s board.

“The board has full and complete access to all company information required by it. The company is, as always, guided by the instructions and advice of the board in all matters. It cannot provide information to external entities, in the absence of a board direction in this regard,” the Snapdeal spokesperson said. Nexus did not reply to queries from Business Standard.

According to reports, the deal may see Snapdeal's mobile wallet service, Freecharge being sold separately and players like Paytm, Flipkart and MobiKwik are said to be in the fray.

Is it a game-changer deal

There are about 10 million regular online shoppers (of the total 50 million shoppers) in the $12-billion ecommerce market. If the deal Flipkart gets through, it could change the landscape of the sector that is witnessing an intense competition among players.

With intense competition from global rivals like Amazon, homegrown companies like Flipkart and Snapdeal could face even more heat in the coming days.

Amazon founder and CEO Jeff Bezos has recently said the company will keep investing in the Indian market to strengthen technology and infrastructure

What led to the crisis at Snapdeal?

Over the last couple of months, Snapdeal had been grappling with internal challenges. The crisis at Snapdeal is the culmination of a series of errors by its co-founders and its board, raising questions about the roles of all parties involved.

Venture capital firms Kalaari Capital and Nexus Venture Partners, both of which have representatives on Snapdeal’s board, are in a tussle with SoftBank Group Corp., which has two board seats, over the company’s valuation in a potential sale.

The other board members are Snapdeal co-founders Kunal Bahl and Rohit Bansal, and Bharti Group veteran Akhil Kumar Gupta, an independent director. 

Since September 2016, when Snapdeal launched a Rs 200 crore campaign to transform its image, it has held at least three heavily advertised sale events to try and compete with larger rivals Flipkart and Amazon India.

In July 2016, Snapdeal, which had raised some $1.4 billion since October 2014, still had about $500 million left.

Discounts and marketing, along with its daily expenses and those at its payments unit Freecharge wiped out much of Snapdeal’s cash reserves. Earlier this year, the company's founders had admitted having made mistakes and said they would take a "100 per cent cut" in their own salaries.

The Amazon threat

Amazon, which launched its Indian arm in 2013—six years after Flipkart was founded and three years after Snapdeal—already has a formidable presence in the country.

The company’s investment commitment to India is now higher than the total funds raised till now by both Flipkart and Snapdeal together.

And it looks like Amazon is rapidly rising to the top.

In 2014, Bezos committed to spend $2 billion to grow Amazon’s India business, but in June last year, Amazon upped its India commitment by another $3 billion.

According to market analytics firm comScore Amazon.in is the fastest growing marketplace in India and the most visited site on both desktop and mobile.