New Delhi/Bengaluru: China’s Alibaba Group, which has backed Paytm and Snapdeal, is looking to increase its footprint in India and is exploring the acquisition of a stake in India’s largest Internet firm Flipkart Ltd, according to three people familiar with the matter.
The talks are at a very initial stage and the likelihood of a deal is a function of Flipkart’s willingness to offer a discount on its current valuation of $15 billion, the three added, asking that they not be named.
Alibaba is also talking to Snapdeal, two of the three said, but it wants a discount on the firm’s current valuation of $6.5 billion.
Spokespersons at Flipkart, Snapdeal and Alibaba did not respond to e-mails seeking comment.
There are not too many takers for India’s top e-commerce firms at their current valuations, prompting both Flipkart and Snapdeal (run by Jasper Infotech Pvt. Ltd) to approach Alibaba Group for cash, the three people said. While both have enough cash to fund their current burn rates for 12-15 months, they need to raise money this year in order to refill their fast-emptying vaults, the people added.
Yet, the two most valuable e-commerce companies are fearful of hitting the market currently as investors are increasingly becoming cautious about backing mature Internet firms.
Flipkart’s valuation has soared five times to $15 billion since May 2014 when it raised $210 million from DST Global, Tiger Global Management and others. Snapdeal’s valuation has increased more than 6 times since it raised $100 million the same month. Since then, Flipkart has raised $2.4 billion while Snapdeal has raised more than $1.3 billion.
If the Flipkart-Alibaba deal goes through, it will make Alibaba one of the three most important investors in India, along with Tiger Global Management and Japan’s SoftBank Group.
The proposed deal may also lead to progress towards a long-awaited consolidation of India’s large e-commerce businesses. SoftBank, Alibaba’s largest investor, is also Snapdeal’s biggest backer.
As of 31 December 2015, Alibaba had cash and cash equivalents of $17 billion, according to the company’s quarterly earnings report.
Chinese firms are increasingly taking interest in Indian businesses as valuations stabilize. In January, China’s travel booking giant Ctrip picked up a stake in MakeMyTrip by investing $180 million.
After an unprecedented funding boom for start-ups in 2014 and the first half of 2015, investors have turned cautious because of a mix of global macroeconomic factors such as an economic slowdown in China and an interest rate hike in the US, as well as growing concerns over unproven business models.
Flipkart and Snapdeal, in particular, are facing scrutiny from investors about their ballooning losses and the rapid expansion of Amazon India (Amazon Seller Services Pvt. Ltd), which, in July 2014, promised to invest $2 billion in the country over the following few years.
The three companies are engaged in a high-stakes, three-way war for market share, the outcome of which will help shape the future of India’s entire start-up ecosystem.
Over the course of 2015, Amazon gained market share in India at the expense of both Flipkart and Snapdeal, according to publicly available data and several company executives. Flipkart, Snapdeal and Amazon India are all private.
With Amazon investing aggressively and showing no signs of cutting back, Flipkart and Snapdeal will have to keep up their spending on discounts, advertising and logistics. For this, they will need to keep topping up their war chests every 10-12 months.
“You will see only a handful of investors, who have the potential to invest, arm-twist even the large unicorns in order to extract stake at cheap valuations,” one of the three people said.