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Business News/ Companies / News/  Snapdeal acquires Freecharge to expand e-commerce ecosystem

Bengaluru/New Delhi: Online marketplace Snapdeal is buying mobile recharge service Freecharge in the biggest-ever deal in the country’s start-up domain, betting that it can sell products and services to millions of users who currently use the Internet company only to recharge their mobile phones.

Terms of the deal weren’t disclosed but three people familiar with the matter said Freecharge was valued at roughly $450 million.

Since launching in 2010, Freecharge raised more than $120 million from Sequoia Capital, ru-Net, Sofina Capital, Valiant Capital and Tyborne, including about $80 million in February. The deal value is much higher than Flipkart Ltd’s $330 million-plus acquisition of online fashion retailer Myntra last May.

Snapdeal’s bet is somewhat similar to the move made by Freecharge rival Paytm, which launched a marketplace last year to sell phones, laptops and apparel. Both Snapdeal and Paytm are betting that they can convert recharge customers into buyers of other goods and that the presence of a large, and seemingly ready customer base will lower their cost of customer acquisition.

Some analysts and investors, however, were sceptical if a significant number of mobile recharge users have the money to buy laptops, high value smartphones and other products that Snapdeal and Paytm want to sell.

Snapdeal, run by Jasper Infotech Pvt. Ltd, has now bought four companies over the past six months and is looking for more acquisitions as it seeks to build a comprehensive e-commerce system that spans marketplace, logistics, payment platform and other support technology services.

Apart from potential business benefits, the acquisition of Freecharge, which has about 20 million users, also makes Snapdeal the company with the highest daily transactions and the highest user base, two key metrics that investors use in valuing money losing e-commerce businesses.

Now, Snapdeal and Freecharge will together generate more than 1 million daily transactions and have 40 million users on the mobile. Even though a majority of these transactions are low value, money-losing recharge deals and these will hit Snapdeal’s current average revenue per order, the sheer size of transactions may help the company attract higher valuations.

“The strongest use case for a consumer to do a mobile transaction is a mobile recharge," Snapdeal chief executive Kunal Bahl said. “It’s important for us to make sure that our ecosystem provides an opportunity for this tsunami of new users who are going to come on the mobile Internet to make their first transaction, post which we will offer them a host of products and services that they can buy from."

Mobile commerce is booming in the country and the number of mobile Internet users is expected to increase to 480 million by 2017, according to a joint report by Google and A.T. Kearney.

Bahl said Freecharge and Snapdeal will offer incentives and other promotions to their respective customers to persuade them to buy products and services on the other platform.

Analysts said it’s unclear whether recharge customers have the required bank balance to purchase items on e-commerce platforms. Prepaid phone users tend to have low disposable incomes or are in schools and colleges and don’t have as much cash to spend as professionals.

“I’m not sure whether people who are doing mobile recharge will suddenly buy high-value items," said Abhishek Goyal, founder of Tracxn, which sells data on start-ups to investors. “However, the acquisition could add value in other ways to Snapdeal. Freecharge has a large base of credit and debit cards and it can be used as a wallet by Snapdeal," said Goyal, who was an investor in Snapdeal rival Flipkart through his former employer Accel Partners.

The deal is largely driven by the fact that e-commerce companies in India are trying to follow in the footsteps of China’s Alibaba Group, which controls nearly all aspects of China’s e-commerce market.

“(Indian e-commerce companies) want to tick all the boxes," said Mukul Arora, principal at SAIF Partners.

Bahl said “most of Freecharge’s institutional investors" would get Snapdeal stock. Though the companies didn’t disclose the value of the deal, three people familiar with the matter said Freecharge was valued at roughly $450 million. This amount includes the $80 million that Freecharge received less than two months ago.

Freecharge will continue to work as an independent platform after the deal is closed and the company will offer many more “digital goods" in future, Freecharge co-founder Kunal Shah said.

Snapdeal has been on an acquisition spree over the past six months, investing into or wholly buying three firms—software provider Unicommerce, logistics service company GoJavas and luxury fashion marketplace Exclusively.

“Online recharge is a very low margin business and for companies to make money here the only way is to upsell or cross-sell," said Rutvik Doshi, director at Inventus India Advisors. “For any Internet company, the last 12-18 months have seen a massive shift to mobile and the next set of first-time users are going to be mobile-only customers, so it is very important for Snapdeal to have a strong mobile strategy."

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Updated: 10 Apr 2015, 01:13 AM IST
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