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Flipkart.com co-founder & CEO Sachin Bansal. Analysts say the stake purchase in Myntra may be a stock deal, considering that Flipkart will need funds to compete against Amazon and Snapdeal.com. Photo: Hemant Mishra/Mint
Flipkart.com co-founder & CEO Sachin Bansal. Analysts say the stake purchase in Myntra may be a stock deal, considering that Flipkart will need funds to compete against Amazon and Snapdeal.com. Photo: Hemant Mishra/Mint

Flipkart investors close ranks to take on growing competition

Flipkart may buy major stake in online fashion retailer Myntra.com in deal said to be driven by common investors

Bangalore/New Delhi: As Amazon.com Inc.’s India unit moves aggressively to carve out a larger market share in India, investors in the company’s largest Indian rival Flipkart.com are closing ranks to increase their firepower against the world’s largest online retailer and local competitors.

Flipkart is in advanced discussions to buy a majority stake in online fashion retailer Myntra.com, in what is set to be the largest deal in India’s fledgling e-commerce business, according to three people with direct knowledge of the talks. The people declined to be named because their company policy does not allow them to speak to journalists.

The transaction is being driven by private equity firms Tiger Global Management and Accel Partners, which are common investors in Flipkart and Myntra and which have the largest exposure to Indian e-commerce firms. After initial scepticism, Flipkart’s co-founders Sachin Bansal and Binny Bansal as well as Myntra co-founder and chief executive Mukesh Bansal gave their approval to the deal earlier this year, two of the three persons cited above said.

Myntra is “exploring a strategic tie-up and is evaluating it from all angles with the intent of ensuring that our Myntra brand agenda is accelerated," CEO Mukesh Bansal said in an email through a spokesperson. “We are in talks with both strategic and financial investors and have not finalized anything yet."

A Flipkart spokesperson said in an email that the firm doesn’t comment on “speculations".

At least one existing Myntra investor, Kalaari Capital, is likely to exit while Wipro Ltd chairman Azim Premji’s investment firm Premji Invest is likely to get shares in the combined entity, said one of the three persons cited in the first instance.

Myntra may be valued at between $300 million and $330 million, although the companies are still negotiating the price and the valuation can change, this person said.

That would make it the largest ever deal in India’s e-commerce sector following the $135 million buyout of bus ticketing site Redbus by the Ibibo Group, owned by the South Africa-based media and Internet conglomerate Naspers Group. Naspers is also an investor in Flipkart.

Tiger Global Management declined to comment while Accel Partners as well as Myntra’s other investors Premji Invest, IDG Ventures and Kalaari Capital did not reply to emails sent on Monday seeking comment. Sofina Capital, another common investor in Flipkart and Myntra, declined to comment. Naspers did not reply to an email seeking comment.

Analysts said the stake purchase was likely to be largely a stock deal, considering that Flipkart would need significant funds to compete against the likes of Amazon and local rival Snapdeal.com.

“It will be heavily bent towards a stock deal with a small pie of cash involved. There is no way it can be a full cash deal because both the companies would not want to snap their cash at this moment when competition is intense in the market," said Ashish Jhalani, founder, e-tailing India, a consultancy

The deal, the likelihood of which was first reported by The Times of India newspaper in January, is likely to be completed in the “next few weeks", the three persons cited above said. None of them specified a completion date for the proposed buyout as the companies and their investors are still working out a deal structure that would be in compliance with Indian laws.

“The reason it is taking so long to close the deal is that it’s a very, very complicated deal. There are some 10-15 parties involved; you have Flipkart incorporated in Singapore while some investment entities are registered in Mauritius and Myntra in India…so it’s taking time to work out the legal structure and take care of legal complexities involved," the lone person cited above said.

India prohibits foreign direct investment (FDI) in e-commerce but allows it in the marketplace model, where third-party sellers sell directly to shoppers through e-commerce platforms.

To circumvent regulations, most e-commerce firms have set up complicated structures where their back-end entities receive funds from global investors, while on paper the e-commerce platforms are run separately.

This structure has caught the eye of regulators.

Both Flipkart and Myntra are being probed by India’s Enforcement Directorate though the companies don’t expect that to have any effect on the proposed deal.

Mutually beneficial deal

India’s e-commerce market, valued at $3.1 billion by brokerage CLSA, is getting increasingly competitive. After two years of consolidation that involved many e-commerce sites shutting shop, the top four—Flipkart, Snapdeal.com, Myntra and Jabong.com—have raced away from the rest of the pack and has been joined by Amazon.

Amazon launched its India marketplace in June last year and has already built one of the largest online product assortments in the country. Amazon has been lobbying heavily to convince India to allow FDI in e-commerce, and the company’s executives have told Mint that it is investing “hundreds of crores" in India.

Amazon country head Amit Agarwal said in an interview in February that the company is here to stay for the “long-term".

Given Amazon’s intentions, its financial muscle and technology expertise, local firms are likely to find it tough to compete against the Internet giant. “One of the main reasons (behind the deal) is that a merged entity would be able to compete much better against the likes of Amazon. It gives Flipkart readymade scale," the lone person cited above said. “Also, Flipkart’s fashion business hasn’t been as successful as it was expected, plus Myntra would get access to a very large pool of funds. It’s a mutually beneficial deal."

Flipkart said in March that it was on course to sell goods worth as much as $1 billion annually on its website, achieving its target a year in advance and becoming the first Indian e-commerce firm to achieve the milestone. However, books and electronics together still generate a majority of its business and the company didn’t come close to achieving its goal of becoming the largest online fashion retailer by the end of last year.

Myntra raised $50 million in January, mostly from Premji Invest. Until then, it had struggled to attract takers as investors were waiting to see how Flipkart’s push into apparel as well as aggressive competition from Jabong would affect Myntra.

Still, Myntra is India’s largest online fashion retailer and its CEO Bansal said in February that the company expects to reach $1 billion in gross merchandise value by 2016.

Given that Myntra is one of the few established brands in e-commerce, if the merger goes through it will continue operating as an independent company as well as retain its site, the two people together cited above said.

Accel Partners and Tiger Global Management had driven another merger between their portfolio companies in February 2012 when Flipkart bought out online electronics retailer Letsbuy.com.

That deal did not work out and Flipkart later shut the site.

“There is no way Myntra would go the way of Letsbuy. It’s one of the most popular online brands and the market leader in apparel—that’s one of the reasons for the merger; it makes no sense to shut it down," the lone person said.

Mukesh Bansal is likely to continue with the company as CEO and investors are “confident"of retaining the senior management at Myntra that includes co-founder Ashutosh Lawania, the two people together cited above said.

Bansal, who owns less than 10% of Myntra, will receive at least some cash payout and at least 10 other senior management executives are likely to earn more than 1 crore each, said a fourth person, who is familiar with the matter.

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