 "Myntra, Flipkart")
Flipkart is one of those companies that never ceases to surprise or stay out of the news. Just when reports of trouble on the valuation front stopped appearing, the company announced an acquisition of its competitor.
Flipkart's Myntra is acquiring Jabong from its parent company — The Global Fashion Group (GFG) — in an all-cash deal for $70 million. Jabong had created a niche for itself in the online fashion retail segment, one of the fastest-growing segments in the e-commerce space. Based on this logic alone, the acquisition makes sense for Flipkart. However, there are other details which suggest the contrary.
The valuation paid by Flipkart looks cheap. But one should also consider the fact that Aditya Birla group valued the company at half the price Flipkart paid for the company. Also, it has been reported that Jabong, in early 2015, was asking for a price of $1 billion when it was in talks with Amazon and by September 2015, the valuation had fallen to $500-800 million.
Secondly, there were governance issues in Jabong, which Flipkart was willing to look the other way. Reliance Retail bid $60 million for the acquisition, but wanted to conduct a complete due diligence before takeover. This was not acceptable to the promoters of GFG.
Snapdeal, a serious contender for the acquisition, was tentative in its bid and raised issues of regulatory compliance and alleged corporate governance issues that were reported in the media. Flipkart seemed to be in a hurry to lap up the company.
One of the main reasons for Jabong’s loss in market share and valuation was when its promoter decided to put the company on the block and stopped its line of credit. Till November 2014, Jabong gave its key competitor Myntra a run for its money in terms of sales with each controlling nearly 30% of the market share. As funding dried up, Jabong started losing market share as well as key personnel.
Myntra, on the other hand, grew by leaps and bounds, helped by Flipkart who gave them a lifeline of $100 million at the time of acquisition. An aggressive Myntra and an even more aggressive Amazon pushed Jabong down the tunnel. Before the deal, Jabong was posting a loss of Rs 415 crore on revenue of Rs 933 crore.
The question then arises — why did Flipkart bail out a company which had seen a fall in market share and would have probably closed down, had it not been saved by the buyout. Jabong’s promoters themselves did not see any point in continuing to operate in a country where visibility of profits is low. In his statement to the media, Romain Voog, CEO of GFG said, “Through the sale of Jabong, we are achieving a milestone in our strategy to refocus and invest in our core markets that show both, significant growth and revenue potential but also a clear and predictable path to profitability.” One hopes that Flipkart is able to see profitability with their acquisition which Jabong’s promoters could not.
Analysts say that the product mix of Jabong and Flipkart through Myntra are supplementary. While Jabong caters to women through its array of international brands, Myntra has a majority of male shoppers. This space was too big to lose as Amazon was gaining market share with its global sourcing base, something which Flipkart could not do.
Finally, the deal seems to be pushed by Flipkart’s private equity investors rather than the promoters. This report quotes a source involved in the deal as saying that Lee Fixel of Tiger Global Management was in favour of the deal and pushed for the deal. The quote also says that the rationale was that with Jabong, Flipkart would be out of reach of Amazon for good in at least one category. But Amazon with its huge commitment for India of over $3 billion (unlike Flipkart which has to run to its private equity financiers every time it needs money) might hit a speed bump post this acquisition, but it is only a matter of time before it will overcome others.
With Flipkart’s valuation being written down by its investors, acquisition of a loss making competitor is unlikely to add to Flipkart’s valuation. However, if Jabong would have failed, Flipkart and other e-commerce companies’ valuations would have taken a beating.
