Zomato Investors Write To SEBI, Unhappy With Late Blinkit Disclosure
Zomato, a food delivery company, has acquired Blinkit, a struggling 10-minute grocery delivery startup, for $568.1 million in an all-stock deal as it seeks to diversify its services at a time when its shares are trading for much less than their launch price and less than half of their all-time highs.
The Gurgaon-based company said that its shareholders had accepted the acquisition of Blinkit. The transaction represents a huge value erosion for Blinkit, which raised around $700 million, primarily in the form of equity and became a unicorn a year ago. The two companies valued the purchase at between $700 million and $750 million when they first decided to pursue an acquisition earlier this year.
Blinkit is relieved by the acquisition after struggling for several quarters to attract money from both new and the majority of its existing investors.
The SoftBank-funded business, known initially as Grofers, changed its focus to same-day grocery delivery last year. This year, Blinkit reduced the number of its dark storefronts, scaled back operations in many locations, and committed to intensifying its focus on 10-minute food deliveries. According to the firm, it would cease operations in such cities if its deliveries cannot reach the customers within 10 minutes.
Zomato will find a partner in Blinkit that can support its push in rapid grocery delivery or even just groceries, two markets it has previously tried to break into but was unable to do so.
Since the last year, “quick commerce” has been our stated strategic focus. Customers have found major value in receiving groceries and other necessities quickly delivered, which has led to this industry’s rapid growth both in India and beyond. Zomato has the potential to succeed in the long run since this business works well with our leading food business, according to Zomato CEO Deepinder Goyal.
Blinkit competes with the more recent and well-funded company Instamart of Swiggy, which counts SoftBank among its investors, and the Zepto-backed by YC Continuity. Zomato, which is far older than all the other companies described above, competes with Swiggy, which is valued more than twice as much as Zomato in the private market.
This year, Swiggy, which plans to go public next year, announced that it would invest $700 million in Instamart, its same-day delivery service.
In a report to customers earlier this month, analysts at HSBC noted that several investors had questioned Zomato’s choice to buy Blinkit and expand into the quick food delivery market. However, the analysts presented a case for why Zomato had to make the deal.
“There are essentially three business models for grocery delivery. Quick commerce (10–15 minute delivery) and extremely confined SKUs (1,000–2,000) are at one extreme, and a full kitchen offering (delivery the next day) and 25,000–30,000 SKUs are at the other. While the latter are planned purchases, the former is “instinctive” purchases.
Theoretically, impulsive purchases are more need-driven and less discount-driven than planned purchases, which are more assortment- and discount-driven. They explained that 4,000–5,000 SKUs fall somewhere in the middle, providing advantages and trade-offs for both planned and impulsive purchasers.
In our opinion, Zomato must seek to position its grocery business closer to the centre of this structure and use technology to plan and operate its dark stores to provide 4,000–5,000 SKUs with 10–60 minute delivery TAT. Zomato’s main concerns for developing a successful grocery business include:
- Cross-selling to its client base.
- Integrating the IT stack.
- Constructing fulfilment infrastructure.
Although Blinkit CEO Albinder Dhindsa had said in a TV appearance that the company was not in merger/acquisition talks with Zomato. Zomato, which was already an investor in Blinkit, started talks with the younger business for a full acquisition last year.
From coverage of last year:
Since they have been longtime friends, the leadership teams of Grofers and Zomato started looking at this investment early this year. According to the source, both businesses are open to the concept of Zomato taking a majority share in Grofers in the upcoming quarters. Still, no decision has been made, and the possibility won’t be thoroughly examined until Zomato goes public.
The Gurgaon-based company Zomato, which bought Uber’s Indian food delivery business early last year, has told some of its key investors that it sees a future in which it has expanded significantly beyond the food delivery category, according to the source who asked to remain anonymous because the talks are private.
The most recent investment Zomato has made in recent months is the purchase of Blinkit. Additionally, it has backed the startups UrbanPiper for business-to-business transactions, Shiprocket for logistics, Magicpin for discovery, CureFit for fitness and wellness, Adonmo for adtech, Mukunda for food robotics, and Shiprocket for discovery.
The firm had a cash balance of around $1.6 billion at the end of the March quarter.
About the complaint: Zomato Investors Write To SEBI
Several Mumbai-based high net worth individuals (HNIs) have complained in a letter to the chairman of the Securities and Exchange Board of India that meal delivery company Zomato failed to provide timely disclosures concerning its acquisition of the grocery delivery startup Blinkit.
On June 24, the unicorn food delivery company informed the stock markets that its board had approved the purchase of Blinkit for INR 4,447 Cr ($568 Mn).
However, according to a report from ET, the investors said that the late announcement caused them to lose money. It is wise to point out that Zomato’s shares fell by as much as 23 per cent a week after the deal was announced.
The fall in share prices suggests that investors are not as confident in the acquisition, notwithstanding the favourable opinion provided by equities research companies and their experts.
The June 29 letter indicated that the deal in question was the subject of news rumours before it actually took place. Within a short period of time, Zomato had made two investments in Blinkit.
Investors claim that the meal delivery unicorn did neither confirm nor deny the reports, which caused the share price to crash.
Zomato has argued that the notification was made on time and in accordance with the applicable requirements. Zomato informed that it has followed all applicable laws and relevant Sebi recommendations and made the required disclosures following the board’s approval of the transaction and the signing of the definitive agreements.
It is wise to mention at this point that SEBI requires listed businesses to disclose any information that could affect their stock price immediately. However, the decision over whether a particular detail is price-sensitive and when to reveal it remains with the company.
Additionally, according to SEBI’s insider trading regulations, any price-sensitive information must be immediately communicated to investors. Furthermore, the regulations stipulate that if such information is in the public domain, the company must either confirm or deny it to investors.
Zomato went to great measures to prevent the deal’s specifics from becoming revealed. The food delivery juggernaut disclosed the same day at 12:03 AM, noting that its board would discuss an “acquisition-related matter” in the morning, although it did not specifically mention Blinkit.
“Under Regulation 29 of Listing Regulations, as amended, this is to inform you that a meeting of the board of directors of Zomato Limited (“the Company”) is scheduled to be held on Friday, June 24, 2022, to discuss a potential acquisition transaction by the Company,” the aforementioned disclosure read.
In the 3 days following the completion of the Blinkit purchase, Zomato’s market cap has lost more than INR 10,000 Cr.
Zomato loses $1.1-billion market value in just two days after the acquisition of loss-making quick-commerce firm Blinkit
After the food-delivery firm announced the acquisition of loss-making quick-commerce business Blink Commerce, Zomato’s market value dropped by nearly $1.1 billion in just two days. Some experts believe this will have an adverse effect on future growth.
In Mumbai trading on Tuesday, Zomato, one of the first groups of online unicorns to access India’s capital market, fell 8.4%, following a Monday decline of 6.6%.
Shares were sold for Rs 60.3, or 21% less than the IPO price, after a two-day decline.
The acquisition will push back Zomato’s route to profitability by another year, according to Rahul Jain, an analyst at Dolat Capital Market, by increasing its operational deficit to support Blink and its Blinkit application.
The successful listing of Zomato last year paved the stage for the initial public offerings of several Indian unicorns, including One97 Communications, the parent company of digital payments company Paytm. However, with many businesses still operating at a loss and choosing the inorganic route of acquisitions to grow, concerns have been raised about the valuations of the so-called new-age technology enterprises and their business models.
Zomato made its initial investment in Blink in August 2021 and is supported by Sequoia Capital and Jack Ma’s Ant Group Co., among others.
The business said that the acquisition would save some costs while enabling it to expand its fleet of local delivery services.
According to a note from Swapnil Potdukhe of JM Financial Institutional Securities, the acquisition expands Zomato’s reach beyond food delivery and “highlights the management’s bigger intentions of taking a major chunk of India’s $1.3-trillion commerce sector.”
Why are investors unhappy with the Zomato Blinkit deal?
The shares of Zomato have dropped about 19 per cent in just two days since the announcement of the Blinkit purchase, losing value on each of the three days. What causes the stock markets to be so dissatisfied with the Zomato Blinkit deal? Ultimately, the stock-swap transaction, which cost Rs. 4,447 crore,
Zomato will establish itself as a market leader in the rapid commerce and food delivery sectors. Markets assert that it might not be so straightforward. Why investors are dissatisfied with the Zomato Blinkit acquisition
First off, both are consistently losing businesses that spend money. The idea was that the fusion of fast food delivery and efficient commerce would act as a magic elixir to allay market worries. But this is the reason the markets are unsatisfied.
1) The fact that the transaction was not entirely performed at arm’s length worries them the most. After all, a supporter of one of the businesses is married to a co-founder of the other. Due to the fact that this deal involves too much family business, the markets are extremely concerned about it.
2) Due to equity dilution, concern has been expressed about Zomato, a company that is listed on the stock exchange. The stock swap has eroded Zomato’s equity by a total of 8%, which represents a significant loss in equity capital and earnings. As a result, future per share economics is expected to be challenged.
3) The purchase of Blinkit by Zomato for Rs. 4,447 crores does seem like a lot to pay for a business like rapid commerce, which hasn’t yet proven it can succeed on its own. Even though many enterprises engaged in quick commerce are valued extravagantly, proving profitability is still challenging.
4) Zomato would take over the Rs1,125 crore in debt it had extended to Blinkit earlier this year in addition to issuing 62.9 crore new shares to purchase Blinkit in a stock swap. The actual amount paid by Zomato is closer to Rs7,447 crore when you include the debt assumption and the investments made to compensate losses of Blinkit.
