Who gains from Paytm-FreeCharge merger?

Homegrown e-commerce major Snapdeal’s downfall has given way to some hectic activity in recent times. While a few online players are at the forefront trying to secure a share of the spoils, some others seem to be manoeuvring through the confines.

The latest entrant in this race for supremacy is India’s largest wallet company Paytm.

According to a person privy to the development, the Alibaba-backed firm has signed a non-exclusive term sheet to acquire Snapdeal’s digital payments unit FreeCharge in an all-cash deal. “The deal is indeed happening,” the person told VCCircle.

Earlier in the day, The Economic Times cited an unnamed person, to peg the Paytm-FreeCharge deal at $45-90 million, adding that Paytm is expected to “begin financial and commercial due diligence of FreeCharge next week” and, if successful, it could be finalised in a month.

Vultures circle the sky

Since the news of Snapdeal’s imminent downfall started making the headlines over the past six months, several rival wallet companies, including MobiKwik, PayPal, and PayU, had made a beeline to get it at a discount. However, as it has turned out now, Paytm has had the last laugh.

The Gurgaon-based e-commerce company, run by Jasper Infotech Pvt Ltd, had bought FreeCharge for $400 million  in one of the largest deals in the Indian consumer internet space in mid-2015. But for the past one year it was struggling to get funding for the wallet business.

Snapdeal is also in the process of finalising its sale to Flipkart at a much lower valuation. According to news reports, Flipkart has already made an informal offer of $1 billion for the beleaguered firm, a far cry from its peak valuation of $6.5 billion. The deal is being orchestrated by Snapdeal’s largest shareholder SoftBank Group.

What is in it for Paytm

VCCircle spoke to several industry experts, and almost everyone said that Paytm is not going to gain anything out of the FreeCharge deal.

“I don't see any gain for Paytm coming from this acquisition as users on both platforms would be the same. I would have rather preferred Flipkart acquiring FreeCharge as it would have helped the e-commerce company increase its approach towards the fintech business,” an industry veteran said on the condition of anonymity.

A fin-tech investor echoed similar views: “This merger means taking one competitor out of the market and that will add less confusion from the consumer’s perspective. This is a clear sign of market consolidation.”

The CEO of a top fintech firm was equally dismissive. “There is nothing for Paytm,” he said, adding: “Flipkart should have been more interested in FreeCharge than Snapdeal, which will anyway not going to add any value to Flipkart. Getting one of the top three consumer wallet companies on-board as part of the deal (Snapdeal-Flipkart merger) is something the top e-commerce company should have been eyeing as their PhonePe has not been able to get the kind of brand visibility that FreeCharge has in the market.”

However, Paytm could benefit from FreeCharge’s strong tech team and brand value, besides its patented technologies, including on-the-go pin and free couponing, the investor added.

SoftBank: the brain behind the deal?

SoftBank – one of the key stakeholders in Alibaba – is likely to pump in $1.9 billion (Rs 12,000 crore) into the Vijay Shekhar Sharma-led Paytm, valuing the firm at a whopping $9 billion.

Indutsry experts believe that SoftBank could be orchestrating the deal between Paytm and FreeCharge, along the lines of a Flipkart-Snapdeal merger, as in both the cases the Japanese company will get significant equity in both companies.

A lot has already been reported on how SoftBank is increasing its influence on India's internet consolidation space and, if recent developments are anything to go by, the Japanese conglomerate has set its eyes on all major and booming sectors in India, including e-commerce, fin-tech and groceries.

On the e-commerce front, SoftBank has already finalised the merger between Flipkart and Snapdeal.

In the fin-tech space, the Masayoshi Son-led firm could be the brain behind the Paytm-FreeCharge buyout.

Similarly, it is also looking at ways to merge its e-grocery bet Grofers with market leader BigBasket.

The consolidation exercise could indeed be SoftBank’s way of cutting down on competition and getting significant shareholding in all market leaders.

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