Azim Premji’s objections jeopardise Flipkart-Snapdeal merger

Flipkart Online Services Pvt Ltd's planned acquisition of rival Indian e-commerce firm Snapdeal has hit a snag that may put the deal in jeopardy, or at least substantially drive down Snapdeal's valuation from a previously agreed-upon $1 billion.

The family office of billionaire Azim Premji, one of the early but smaller investors in Snapdeal, has written to its board objecting to special payouts for the founders and two larger investors, Kalaari Capital and Nexus Venture Partners, as part of the buy-out deal with Flipkart. This puts in jeopardy India's biggest ecommerce merger, reports Bloomberg citing sources familiar with the discussions.

Snapdeal founders Kunal Bahl and Binny Bansal along with Kalaari and Nexus had negotiated hard on compensation because Snapdeal's proposed sale at a valuation of $1 billion is a fraction of its peak valuation of $6.5 billion. Kalaari and Nexus are set to receive $60 million in addition to equity in Flipkart, while the founders get a combined $30 million under the terms of the deal.

Flipkart had earlier told Snapdeal that it wants all the investors to agree to deal terms as a precondition of the transaction, said Bloomberg's sources, who asked not to be identified discussing information that's not public.

The sticking point has been the differential payments, which are seen as an attempt to win over larger Snapdeal investors and the founders who have to agree to a vastly lowered valuation.

PremjiInvest sent a letter to the Snapdeal board on Wednesday saying that the $90 million to be handed to this select group of early Snapdeal shareholders and founders isn't acceptable, the sources said. Another $30 million in special payments proposed by the Snapdeal board for the employees, on the other hand, is okay, the letter said.

The letter said that other small investors were also unhappy with the difference in payments.

The two companies struck a preliminary agreement last month but the talks have bogged down over how Snapdeal's investors and employees will be compensated.

The disagreement imperils a deal that was meant to slow Amazon.com Inc's growth in India by combining to create a strong local competitor. Amazon chief executive officer Jeff Bezos has pledged to spend $5 billion in the country to gain share as the market surges.

SoftBank Group Corp, the largest shareholder in Snapdeal, has pushed for the deal and ultimately persuaded the company's two founders as well as venture backers Nexus Venture Partners to approve it. The non-binding preliminary agreement calls for Snapdeal's valuation to be reduced to about $1 billion from $6.5 billion, with existing shareholders getting a proportionately reduced stake in the combined business, or cash. Premji's objections could cause Snapdeal's valuation to tumble further.

Emails sent to SoftBank, Snapdeal and early backer Kalaari Capital by Bloomberg were not immediately answered. A spokesman for PremjiInvest declined to comment saying the matter is 'confidential'.

Snapdeal's other small investors include the family office of Ratan Tata, the former chairman of the salt-to-software conglomerate Tata Group, as well as Intel Capital and Bessemer Venture Partners, BlackRock and Temasek.