Zomato announced acquisition of loss-incurring firm Blinkit (Previously Grofers Ltd) for Rs 4,447 crore. The payment will be settled through issue of around 629 million Zomato shares (around 6.88 per cent equity dilution on fully diluted basis) at the prescribed preferential allotment price of Rs 70.76, and cash acquisition of Hands on Trades Pvt Ltd (Blinkit’s wholesale arm) for Rs 60.7 crore.
The deal (after including the incremental ESOP pool created) values Blinkit (EV basis) at $750 million (Rs 5,860 crore), lower than $1.1 billion in August 2021.
Shares of Zomato extended their decline as they shed 7.5 per cent, to hit a low of Rs 61 per share on the BSE. The stock has declined 14 per cent in two days after it announced the acquisition of quick commerce firm Blinkit.
Zomato could take longer to make profits after it acquires Blinkit for a pricey Rs 4,447-crore amid intense competition in the quick commerce industry, said analysts.
Zomato expects a meaningful number of Blinkit’s dark stores–used to serve rapid online deliveries–to turn profitable within the next one year and make the entire business viable on adjusted Ebitda (earnings before interest, tax, depreciation, and amortisation) levels, in less than three years.
“However, due to limited financial and operating data, nascent operational history, and intense competition, we forecast Blinkit to turn profitable only by fiscal year 2026-27 (FY27). As a result, we believe that Zomato’s path to profitability may get extended from FY25 to FY26,” said a note by JM Financial.
Blinkit has more than 400 dark stores, down from more than 450 in January 2022. “While the average order value (AOV) of Rs 509, and 14.4 per cent take rate is impressive, the contribution profit per order, at -Rs 84, is weak. Increased throughput, along with reduced cost per delivery, will be the key driver of profitability,” said analysts at Edelweiss Securities.
Global brokerage Credit Suisse said as Blinkit’s business is in its early stage, the deal will likely raise Ebitda loss for Zomato in FY23/FY24.
Expensive deal
According to the terms of the deal, the purchase consideration of Rs 4,508 crore will be paid to Blinkit equity holders in the form of all-stock acquisition of Blinkit Commerce Pvt Ltd for Rs 4,448 crore.
The payment will be settled through issue of around 629 million Zomato shares (around 6.88 per cent equity dilution on fully diluted basis) at the prescribed preferential allotment price of Rs 70.76, and cash acquisition of Hands on Trades Pvt Ltd for Rs 60.7 crore.
The deal (after including the incremental ESOP pool created) values Blinkit (EV basis) at $750 million (Rs 5,860 crore), lower than $1.1 billion in August 2021.
“While the company has taken a hair-cut to the earlier paid valuation, we believe Blinkit needs further investment of $250 million, which could be invested over FY23-24. This will take Zomato’s total investment in Blinkit to $1.05 billion, including the current deal, and investment done in August last year,” said analysts Kotak Institutional Equities in a report.
Those at Edelweiss Securities, too, said the acquisition at 21x FY22 price-to-sales (P/S) is an expensive proposition with Zomato itself trading at 13x FY22 P/S.
“Blinkit has reported only 20 per cent revenue CAGR over FY20-22, and continues to make heavy losses in a hyper competitive environment. The average P/S multiple across various industry verticals in 2021 was about 17x P/S. Faltering execution, leading to integration issues, and higher up cash burn are the key risks,” it said.
Increased competition
Analysts believe quick commerce may witness intense competition over FY23-25 with players like Reliance Retail (via Dunzo), Tata’s BigBasket, Swiggy’s Instamart, and Flipkart’s Quick already in the space.
“With a large upfront investment, we don’t see immediate value accretion from Blinkit acquisition. We bake in merger-related dilution, and continue to provide for $400 million of Blinkit-related losses, resulting in a revised fair value of Rs 77 (from Rs 83). This drives a downgrade in our rating to ADD from BUY,” said KIE.
It will give Japanese investor SoftBank shares in Zomato, but also allow it to make some money from the investments it has made in Blinkit.
SoftBank will get about 4-5 per cent stake in the listed entity. SoftBank is the largest shareholder in Blinkit, with 44 per cent stake.
“So far, the company has invested about $300 million. With this, it may end up making around $325-330 million, depending on where the share price of Zomato goes,” said one of the sources in the know.
The bigger question on everyone’s mind is how Deepinder Goyal will justify shareholders on the transaction. It was Zomato’s $100 million that took Blinkit’s valuation to $1 billion. Earlier this year, the company also extended a loan of $150 million to Blinkit.
Source: Business Standard
