Zomato-Blinkit Deal: Online food delivery unicorn Zomato and instant delivery service Blinkit, formerly Grofers, is in talks to acquire 10-minute grocery delivery platform Blinkit (formerly Grofers), entered into a merger agreement. Zomato, in an exchange filing, said that it will extend a loan of $150 million to Blinkit to support its capital requirements.
Zomato – A Saviour for Blinkit
Blinkit’s merger move with Zomato comes at a time when it has been struggling to raise funds, forcing it to lay off employees and shut down its warehouses to conserve cash.
“The proposed investment is subject to fulfilment of certain customary conditions precedent and other terms and conditions agreed under the investment agreement executed between the parties,” Zomato said in the filing.
Prior to this, Zomato also invested around $100 million into Blinkit in August last year. At that time, Zomato said that it has plans to invest a total of $400 million into Blinkit, part of which would be structured as convertible notes. Zomato acquired a 9.3 per cent stake in Blinkit at that time but also hinted at a potential merger in the works.
Zomato Forays Into Quick Delivery Business
By planning to acquire Blinkit, Zomato has underlined its commitment to the quick-commerce space. In fact, its investment in Blinkit last year also meant Zomato would be bringing groceries back onto the platform after discontinuing it in 2020. In its third-quarter earnings report, Zomato said it is aggressively growing the quick-commerce segment and will invest $400 million over the next two years in the category.
Zomato-Blinkit Deal: Who Gets What
Zomato’s takeover of Blinkit is expected to be completed in 60 days, the people said. SoftBank, which had a 40 per cent stake in Blinkit, will get a 4-5 per cent stake in Zomato as part of the transaction while Tiger Global and Sequoia Capital will get additional shares in the entity, they said, without disclosing further details.
However, something worth mentioning here is that Softbank, one of the major investors in Blinkit, will now hold stock in Zomato through the share swap. Sources suggest its stake could be between 4 per cent and 5 per cent. This means Softbank will now hold a stake in both Zomato and its arch-rival Swiggy in the food-tech sector along within the quick-commerce space.
Will Markets Cheer?
According to market experts, the timing isn’t great for either party. Zomato’s stock is already battered, and the market may punish it more for acquiring a cash-guzzling business. For Blinkit, Zomato’s fallen stock value means that the transaction, a 10:1 equity swap, will drag its valuation below the USD1 billion unicorn status. Sources say Blinkit could now be valued at around USD700 million. However, the merger may have been necessitated by the intense competition in the quick-commerce space and due to incessant cash burning, with reports suggesting Blinkit has had to shut a few dark stores as it was running out of cash.
Explaining the probable effect of the share swap deal, Samir Bahl, CEO, Investment Banking at Anand Rathi Advisors, said: “Might have some pressure on the stock in the short term depending on the share swap ratio and the final valuation assigned to Blinkit shares. The Blinkit business has been under pressure. However, in the long-term the addressable market is huge & Zomato’s significant network & resources can be leveraged to create value for shareholders.”
What Should Investors Do?
Shares of Zomato jumped more than 2 per cent on March 16. HSBC Securities India said the potential merger of Blinkit with Zomato will provide the online grocer access to the food delivery aggregator’s customers while enabling Zomato to enter the online grocery market, which has a larger total addressable market.
Meanwhile, BofA Securities believes Zomato’s capital infusion in Blinkit would lead to higher losses for the food aggregator, raise risk of a cash call and is at odds with Zomato’s earlier commitment to focus on one core activity for the next few years.
Speaking about if investors should buy the newly-listed stock, Divam Sharma, Founder at Green Portfolio, said: “Zomato is currently trading at a valuation of below $8bn. For retail investors, we would suggest avoiding the stock for now and waiting for the growth to come and the synergies from investments and Blinkit acquisition to come. We would also want to see the growth in the core business which is food delivery as other synergies will take time to reflect.”
At 12:40 pm, shares of Zomato were down 0.065 per cent at Rs 76.55 on the National Stock Exchange.
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