Axis Bank buys FreeCharge for Rs 385 cr: It's the right price but sharp valuation fall a wake-up call for startups
Clearly, Snapdeal overpaid when it bought Freecharge in 2015 for $400 million
Snapdeal is finally selling off FreeCharge, its mobile transactions platform, to private sector Axis Bank. The bank said in a communication to the Bombay Stock Exchange that it has entered into a share purchase agreement with Jasper Infotech Private Ltd, Snapdeal parent, to acquire 100 percent equity in FreeCharge for a consideration of Rs 385 crore.
Snapdeal's move is likely to expedite its own sale to Flipkart, which has been stuck over valuation issues. Recent media reports said Flipkart has offered $900 million for Snapdeal and the board of the company may have cleared the deal.
Meanwhile, it is to be remembered that Snapdeal bought FreeCharge in a 'cash and stock' deal in 2015 for $400 million or about Rs 2,500 crore (at the rupee exchange rate then). It was touted as "one of the largest acquisitions" in the Indian digital commerce space.
With the acquisition, Snapdeal was set to become the largest mobile commerce company in India, offering the widest range of products and services, including financial services and mobile recharge with an exponentially growing user base of over 40 million, the company said, according to a PTI report.
But interestingly, now the deal is happening at just Rs 385 crore. So is Snapdeal selling FreeCharge for a song? Not really, aver analysts for they reason that the price at which FreeCharge was acquired by Snapdeal was ‘unrealistic’. The price paid by Snapdeal for FreeCharge was a ‘lot of money even then’, said Sanchit Vir Gogia, Chief Analyst and Founder, Greyhound Research. “That was an inflated price for FreeCharge then and I expected the valuation to drop,” he said.
When a company is being sold for one-sixth of the price at which it was bought, it means there was some ‘gross miscalculation’ about its valuation, Gogia said. But in 2015, it made a lot of sense for e-commerce platforms to buy mobile transaction players, said a sector analyst. “Remember, then Paytm wasn’t as big as it is today and FreeCharge was doing well. That was a business call that Snapdeal and its investors took based on the available fundamentals then to buy FreeCharge. Even today when they are selling it, it is the best deal in the circumstances Snapdeal is in today,” the analyst said.
On hindsight, decisions may seem as if they needed a correction or that they were fallible. Snapdeal had a high valuation and in February 2016, was valued at $6.5 billion. “At their peak, Snapdeal had a lot of money they could afford to invest,” said Paula Mariwala, Partner, Seedfund and Co-Founder, Stanford Angels. Snapdeal paid the money to acquire FreeCharge as they felt they could expand their reach with digital payments service. “They also bought FreeCharge as they wanted to beat the competition that Flipkart provided and become number one. Obviously that growth strategy did not pan out as expected,” said Mariwala.
Both Gogia and Mariwala feel that Rs 385 crore is the ‘right’ price for FreeCharge now. “This is the real price of FreeCharge,” they say.
What does this acquisition mean for Axis Bank, which incidentally will be the first one in the banking space to snap up a mobile transaction platform, thus increasing its customer base. The FreeCharge deal, when it materialises is being seen as a sweet deal, by sector experts. From having tech at the back-end like most banks claim to, Axis Bank will be the first to have tech at the front-end too.
The payments space will get shaken up and more banks will now be forced to look at similar acquisitions, say some. “I don’t see any such company in the mobile transaction space in the market to be snapped up though,” said an analyst.
Axis Bank has Axis Pay besides the UPI platform. Now they will be able to integrate FreeCharge with UPI, said a sector analyst. “Axis Bank is tech savvy and with the acquisition of FreeCharge it will further the tech image of the bank,” he said. Also, FreeCharge would have tied up with other players for discounts and those relationships can pay dividends for Axis, he said.
Mariwala is curious to see how this deal will pan out for Axis Bank. She wonders if Axis Bank wants to enter the retail payment space with FreeCharge.
The sale price of FreeCharge is a good wake-up call for the startup ecosystem, founders, investors and those planning to buy similar startups, said Gogia. “Me-too products cannot survive and consolidation is the name of the game. Even Paytm had to turn into a bank to be successful,” he said.
The card space is getting obsolete not just in India but also worldwide. With the government encouraging digital payments and with UPI and the BHIM app, the sector is going to do well, say analysts.
“Yet, India is far behind in comparison to even some countries in Africa in the mobile and digital payments space. Banks are constrained by their own structure and regulation and not able to focus on tech innovations. It makes sense to incubate startups in the fintech space or acquire them. I think we will see more of this trend in the future,” said Devangshu Dutta, chief executive of Third Eyesight, a consulting firm,.
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Snapdeal had earlier this month rejected Flipkart's initial bid of between $800 million and $850 million .
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Axis Bank agrees to acquire full stake in FreeCharge from Snapdeal
Axis Bank has entered into an agreement with Jasper Infotech Private Limited to acquire full stake in the "FreeCharge" brand, a company statement said.