Is Paytm merging with Snapdeal?

By Sainul Abudheen K for e27

Paytm and Snapdeal, two behemoths in the online retail segment, reportedly had merger talks in January this year

Is consolidation imminent in the Indian e-commerce industry? If the recent reports are to be believed, the country will soon see some merger/acquisition deals take place in the online retail segment.

The latest report is that Paytm and Snapdeal, two behemoths in the online retail segment, had merger talks in January this year. The report carried by The Economic Times said that the talks were triggered by Chinese e-commerce giant Alibaba, which has considerable stake in both companies.

If this deal will materialise, Alibaba, which holds 40 per cent equity in Paytm and a 3 per cent in Snapdeal, will emerge as the largest shareholder in the new entity, which will pose a formidable challenge to Flipkart and Amazon, the two largest e-commerce players in the country.

People who spoke to ET, however, said they could not confirm if the deal will eventually materialise.

Paytm, run by Noida-based One97 Communications, recently spun off the marketplace unit into an entity called Paytm E-commerce, which is currently in talks with Alibaba and other investors to raise up to US$250 million. According to people aware of this development, Alibaba is looking for a formal entry into the market by setting up an e-commerce platform in partnership with Paytm, which has raised close to US$800 million in funding to date, from the likes of Ant Financial, Mountain Capital, and K2 Capital.

The Indian e-commerce industry has been in a tangled web since the beginning of last year. Speculations on merger/acquisition talks among various players have been rife.

Last August, VCCircle reported that Snapdeal was in preliminary talks for a possible merger with Flipkart and Amazon India. As per one of its sources, Snapdeal Co-founder Kunal Bahl had met with top executives of US-based Tiger Global, the largest investor in Flipkart, to discuss the merger. However, there have been no updates on the progress of these discussions.

Back in February last year, media reported that Alibaba was planning to acquire Flipkart. However, the talks did not make much headway, as Alibaba felt that the Indian e-commerce giant was overvalued. Since then, Flipkart saw its valuation being marked down several times by one of its minority investors, Morgan Stanley.

A few months later, Bloomberg came out with a report that said Wal-Mart was looking to buy a minority stake in Flipkart. The US retail giant could well be looking for a piece of the online retail pie. As of now, the company cannot open an online retail arm under the current FDI norms.

While e-commerce in India has seen a massive growth of late, the penetration is still low compared to China or the US. Online retailing as a percentage of the total sales happening in India is still in the single digit, or in the low double digits. All the existing players in the market, including Flipkart, Amazon, Paytm and Snapdeal, are looking for a piece of this small pie. Surprisingly, none of these companies are profitable, as a major chunk of their investment is going towards the custom acquisition costs.

Flipkart and Amazon, which together hold a 70 per cent e-commerce marketshare, have been fighting it out to be the numero uno. Flipkart, which was started in 2008, has been under severe pressure from investors to show returns, while Amazon, which entered the market almost four years later, has enough time to grow the business. Amazon became a player to reckon with in a short span, through systematic works and a consumer-centric approach.

The intense battle in the e-commerce market hit Snapdeal the most. The Delhi-based firm, which once enjoyed a position second only to Flipkart, lost considerable marketshare with the entry of Amazon. This, coupled with the funding slow-down in the market, put the company in deep crisis, and it has been unable to secure funding. The company, therefore, has no options but to look for a suitable alliance for a merger/or acquisition to survive in the market. There have been reports that it is laying off around 200 employees in the coming months.

Snapdeal has raised over US$1.5 billion to date from investors, including SoftBank, Foxconn, eBay, and Intel Capital, besides Alibaba.

Paytm, on the other hand, has been steadily growing the business since its inception in 2008. The company got a shot in the arm when Indian Prime Minister Narendra Modi announced the withdrawal of large-value currencies from circulation in the market in November last year. The cash crunch in the market and a cap on the cash withdrawal limit worked in Paytm’s favour and its customer base saw a huge growth ever since.

Unable to stand the pressure from rival Amazon, Flipkart’s Co-founder Sachin Bansal came out against ‘capital dumping’ by foreign VCs and urged the government to formulate policies to protect domestic startups. His demand drew flak from people across the industry.

All this indicates that the battle lines are drawn in the Indian e-commerce space. The industry is closely monitoring the movements of the e-commerce players. Eventually, only one or two companies will survive in the market. Who will have the last laugh?

Only time will tell.

First appeared at e27