High noon at Snapdeal—Who blinks first?

Together with Snapdeal’s founders, Kalaari and Nexus are learnt to have asked SoftBank for $150 million in cash (and not the stock of any acquiring company) in order to agree to a sale transaction.

A sale transaction because any further meaningful or sizeable venture investments into Snapdeal are out of the question. The one-time number-two e-commerce player is in a downward spiral of falling sales, shrinking employee base and collapsing valuations out of which there is no coming. At least not in a way that makes sense for any late-stage venture investor.

Which is why SoftBank wanted to find an acquirer for Snapdeal—Flipkart. The deal was simple—Flipkart acquires Snapdeal at an enterprise valuation of $1 billion, following which SoftBank invests another $1 billion in the company as a continuation of latest $1 billion round. It then acquires $500 million to $1 billion of Flipkart stock from its largest investor, Tiger Global.

SoftBank was understood to even have offered 80 cents in cash for every dollar in Snapdeal stock held by its investors, but at a valuation of $1 billion. Snapdeal’s peak valuation was $6.5 billion.

If things went well, the sequenced transactions would be completed sometime as early as May.

But things didn’t go well, and now SoftBank is locked in a who-blinks-first game of chicken with Kalaari, Nexus and the Snapdeal founders.

The chicken game

There is now the very real possibility that Flipkart may not acquire Snapdeal.

So what, you may ask. Surely there are many other potential acquirers? Better yet, why does Snapdeal even need to sell itself? Didn’t it just announce its decision to go for an IPO?

Snapdeal is a unique company. It’s a company that is trying to hold on to its past valuations even as its current revenues and future growth look appear very dim. Its current revenue (GMV) run rate is estimated to be between $350-400 million annually. In contrast, Flipkart’s is estimated to be closer to $4 billion.

That’s 10x of Snapdeal’s.

Interestingly, if Snapdeal is indeed valued at $1 billion during a potential acquisition, how would that compare to Flipkart’s current valuation?

10x again (Flipkart raised its current $1 billion investment at a valuation of $10 billion).

But we digress—the point is Snapdeal has been in the market for months, to either raise money or to find a buyer. None have materialized. And the reason even Flipkart is considered a potential acquirer is only because of SoftBank.

Acquiring Snapdeal is the ‘tax’ a Flipkart would pay in order to secure SoftBank’s trust and money down the round.

But a $1 billion valuation for Snapdeal would be terrible for Kalaari and Nexus, both of which not only have a veto power on a potential sale decision but also certain ‘tag along’ rights on SoftBank shares.

A ‘tag along’ right is a contractual obligation found in venture capital deals that gives some shareholders (usually earlier or smaller ones) the right to sell their shares if a larger or later investor is selling theirs.

Thus, not only is SoftBank unable to get Flipkart to acquire Snapdeal (because Kalaari and Nexus will veto, unless their terms are met), it is also unable to sell its Snapdeal stake to certain potential acquirers because then Kalaari and Nexus too would demand their stakes are bought on the same terms.

Huge investments

Kalaari and Nexus might wager that SoftBank, with $900 million invested, would be more desperate to recoup it. SoftBank, under Masayoshi Son, an investor that does not take kindly to arm twisting. Both SoftBank insiders and investors beyond talk in hushed whispers of Son-san’s legendary ability to not only take huge bets that seem extremely risky at day zero but also his sense of whimsy that has seen him call off deals where he feels affronted or coerced into doing something that is not of his own choice. Not only might Son-san not take too kindly to Kalaari and Nexus asking for a ‘sweetener’ for letting the deal go through but also he could well reckon that Kalaari and Nexus might not have the stomach to walk away with nothing for their Snapdeal investments if the acquisition by Flipkart falls through.

It would be no surprise if Kalaari and Nexus also recognise this and if the media stories that have been appearing in the last few days are part of a PR battle to even the odds in this staring contest with SoftBank.

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