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Photo Credit: L to R Rohit Bansal,Kunal Shah, Kunal Bahl & Sandeep Tandon

Snapdeal-FreeCharge deal: How India’s top internet M&A was sealed in just 23 days

17 April, 2015

It was a late-January evening when founders and seniors executives of two internet firms— Snapdeal and FreeCharge—sat over a cup of coffee to discuss a potential transaction which later became the biggest deal to date in the history of the Indian internet sector.

It all started when Kunal Bahl, co-founder and CEO of Snapdeal, called his namesake, Kunal Shah, co-founder of FreeCharge, for a meeting.

Shah, who co-founded FreeCharge along with Sandeep Tandon in 2010, had dealt with Snapdeal executives as part of the business. FreeCharge offers mobile-recharging services to its consumers and in the five years of operations, it has partnered with many e-commerce firms, including Snapdeal, for various consumer engagement campaigns.

In most of such partnerships, senior executives would take the initial decisions. At this point in time, a direct call from Bahl for a personal meeting meant something bigger was afoot.

The meeting took place in Sahara Star Hotel, Vile Parle, in Mumbai. Besides the two Kunals, it was attended by Rohit Bansal, co-founder and COO of Snapdeal; Alok Goel, CEO of FreeCharge and Tandon. 

It hardly took a few minutes for Bahl to propose the idea of acquisition of FreeCharge to Shah, Tandon and Goel. “The first question that came to our mind was of synergy between the two firms. We did not want one plus one to be two but 11. The discussion went unfolding. It was a very upfront conversation. We wanted to explore it in detail,” Goel informs VCCircle as he now sits back after sealing a multi-million dollar deal.

“We did not get convinced for the acquisition in the first meeting. We thought of exploring it very seriously. It was open ended from both the sides and then we met one more time, discussed it in more detail and then things started moving faster,” he recalls. 

What helped in the decision was that Bahl’s offer allowed FreeCharge to work as an independent entity and work without any change in the brand name. 

The founders soon agreed to a 21-day exclusivity period post which the deal was signed and closed. 

The companies have not declared the deal value but separate media reports pegged it to be around $400 million. As is the case in all such transactions, bulk of this would be in the form of stock of Snapdeal to be issued to founders as well as investors of FreeCharge.

Goel declines to share the number but says the price was quoted by Snapdeal. “There was no negotiation on the pricing part as such. We thought they proposed a fair pricing because in the larger scheme of things, we could have negotiated the price by 10 per cent. But that would not have created a meaningful discussion. In such discussions 10 per cent here and there doesn’t matter,” says Goel.

Goel should know. He was COO of online bus ticketing startup RedBus, when it was acquired by Naspers in what was then the biggest buyout in the internet space. South African internet company had paid $100 million to buy 80 per cent stake in RedBus two years ago. Post that deal, Goel moved in as CEO of FreeCharge. This was an unusual move for a barely three-year old startup to bring an outsider as professional CEO.

At the time of this deal, FreeCharge was sitting on a good amount of cash, having raised $80 million in a Series C round of funding from a group of investors, including San Francisco-based hedge fund Valiant Capital Management and Hong Kong-based hedge fund Tybourne Capital Management. Its other investors include Sequoia Capital, ru-Net and Sofina, had also participated in the last round.

Indeed, FreeCharge’s latest funding came just days after the top team members of Snapdeal first met FreeCharge with the proposed acquisition. As is the new thinking in tech space, companies are looking to use capital as a barrier to entry for others and for creating a future war chest to deal with competition. A new funding round also acts as a potential valuation jacking exercise; so it’s not surprising that FreeCharge went on to seal a fresh funding despite a potential acquisition with an already cash-rich venture. Snapdeal, which is competing with Flipkart and Amazon, raised close to $1 billion in total last year itself.

Meanwhile, the FreeCharge trio decided that unlike many other hush-hush deals in the market, they would keep it transparent in front of their employees to avoid speculations or rumours.

Immediately after the meeting in Mumbai, the co-founders called for manager-level meetings and disclosed that an acquisition was on the cards but their jobs were safe. This was later circulated among the rest of the staff by their team heads.

“We did not want our employees to get half-baked information from irrelevant sources and panic. So we decided to take them into confidence and share exactly where we were placed and why,” Goel says.

Before the deal closed, the founders had almost half a dozen meetings with their 180 employees. “Basically we kept them informed about every little progress in the deal,” says Goel.

The deal was closed exactly on the 23rd day of the meeting that happened in Mumbai. No bankers were involved in the transaction. Only legal advisors mediated in the transaction—AZB advised the investors; Khaitan & Co and IndusLaw advised Snapdeal and Themis assisted FreeCharge.

“It took a short time because unlike other mergers and acquisitions, here both the companies knew each other really well. We had already worked together on many campaigns and due diligence was not an issue. There was a trust factor which usually lacks in other companies,” Goel says.

FreeCharge would now compete more directly with Paytm, run by One97 Communications, which recently got an investment commitment of $635 million from Alibaba and existing investor SAIF Partners. Paytm runs an m-com marketplace besides its core business of mobile and DTH recharges, bus ticketing and mobile wallet.

Talking about competition, Goel says Paytm has entered into the already crowded and well funded space of e-commerce. “We at FreeCharge never saw this as an option because we thought the market is already occupied, besides we wanted to have a niche in this particular sector.”

Since the recharge business comes strapped with high volumes with small ticket size mobile recharges by pre-paid mobile subscribers and low margins, the deal is expected to significantly push up the transaction volume for Snapdeal as a group.

Indeed, Snapdeal now claims it is the largest mobile commerce firm in India. This can be a strong hook for much higher valuation as investors are now betting big on mobile ventures.

Goel notes that this deal happened without the mediation of investors. Hong Kong-based asset management firm Tybourne Capital was a common shareholder of both FreeCharge and Snapdeal.

However, in this case, it was not the initiator let alone driver of the deal.

“Usually if there is a common investor in two companies, he plays the role of the mediator. But in this case, it wasn’t required. We already knew each other so well that we just went ahead with it and investors were informed gradually,” Goel says.

A clutch of M&A deals in the internet space over the last three-four years has involved common shareholders who pushed for a consolidated play. For instance, Tiger Global and Accel Partners were common shareholders of Flipkart and LetsBuy (Flipkart acquired LetsBuy in February 2012); as well as for Flipkart and Myntra (Flipkart bought Myntra last year).

The deal is particularly significant for Sequoia Capital, the original VC backer of FreeCharge. Although Sequoia is the most active early stage VC investor in the country and counts some marquee bets in internet including Just Dial, in the bustling e-com sector it was one of the few large VC firms that have not backed any of the top horizontal e-tailers.

With this deal, it gets a stake in Snapdeal to add to its exposures in several vertical e-com players. Most recently it has also backed Groupon’s Indian arm in a fairly unusual deal for an MNC.

Talking about Sequoia and Shailendra J Singh, managing director of the investment firm who has been closely associated with FreeCharge, Goel says he is an entrepreneur at heart. “His first concern was what sort of synergy it would make,” Goel says.

Goel also defends the question of why an early exit for a startup stuffed with fresh cash in a growing market. “It is never about five years or a decade. It should be decided on the fairness of opportunity. We are looking at the opportunity from a long-term perspective,” he says.

Another interesting aspect is that now Snapdeal also gets Sofina as a new shareholder. Belgium-based Sofina also happens to be an investor in its bigger competitor Flipkart.

However, according to Goel, this would hardly be an issue: “Many companies pivot and VCs may end up having conflicting investments. But they are professional people. They know how to build a Chinese Wall between competing portfolio companies. They will never share information with each other.”

Post this deal, Goel is stepping down as CEO of FreeCharge. He will now be in charge the new business opportunities for the combined entity.

(Edited by Joby Puthuparampil Johnson)


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Snapdeal-FreeCharge deal: How India’s top internet M&A was sealed in just 23 days

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