Zomato stock hit an all time low amid Blinkit merger talks

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Zomato is going to acquire Blinkit (formerly known as Grofers) in a share-swap deal. Last year, Zomato invested $100 million in the quick-commerce startup at a valuation of a billion. Let us find out more about the deal.

Deal details

  • Zomato and Blinkit have signed up for a merger in an all-stock deal as per the sources.
  • Zomato will be approaching the Competition Commission of India for approval soon.
  • It is expected that shareholders of Zomato would get 10 Blinkit shares for each held in their company. It makes Blinkit valuation at $700 - $800 million, lower than its previous valuation of over $1 billion.
  • Shareholders and investors of Blinkit will get around 10% stake in Zomato. SoftBank, which has a 40% stake in Blinkit, will get around 4-4.5% stake in the merged entity.

Issues with Blinkit

  • Blinkit has been going through a tough time as a company. It has laid off employees, shuttered dark stores, and delayed some vendor payments in the last few months.
  • Blinkit laid staff from Mumbai, Hyderabad, and Kolkata across segments such as riders, pickers, and store managers. This layoff is likely to have impacted close to 5% of the overall strength.
  • Blinkit, last month, signed a term sheet with Innoven Capital for debt worth $10 million which is coming in three tranches. The company received the first part of Rs 25 crore last month.
  • Blinkit was supposed to raise another $500 million from Zomato (after an initial $100 for 10% equity). However, the deal did not go through as all the internet companies face market heat.
  • Blinkit has close to 445 dark stores after shutting down approximately 40 of them in the last couple of months.

Zomato, in an exchange filing on Tuesday said it would grant a loan of up to $150 million to Grofers India Pvt Ltd, Blinkit’s Indian entity. Interest will be charged at 12% annually, with a tenure of not more than a year. The investment was in line with its stated intent of investing up to $400 million in the quick-commerce segment in India.

Zomato continues to face serious competition in the quick-commerce space. Its rival Swiggy is planning to invest $700 million in its Instamart service. Mumbai-based Zepto has already accumulated $160 million. Dunzo has raised $240 million from Reliance Retail to focus on this category, with Ola running pilots.

As per Zomato, “Blinkit is the closest to how we all know the quick commerce business today. 100% of Blinkit's business now is in quick commerce format with a median delivery time of ~12 minutes. Delightful customer experience is leading to high customer retention, ordering frequency and willingness to pay for the service”.

The board of Zomato also approved acquisition of a 16.66% equity stake in Mukunda Foods for $5 million. Mukunda is a food robotics company that designs. “Our investment will help Mukunda Foods scale faster, help reduce restaurant food prices, expand margins, and enhance customer delight”, Zomato said.

The Zomato stock gained 7% on Thursday to end at Rs 81.6.

Brokerage radar:

Brokerage firm HSBC Securities India said the potential merger of Blinkit with Zomato will provide the online grocer access to the food delivery aggregator’s customers while enabling Zomato to enter the online grocery market, which has a larger total addressable market.

Brokerage firm BofA Securities said that the deal could be a negative for Zomato in the near-term. It believes Zomato’s capital infusion in Blinkit would lead to higher losses for the food aggregator. 

Brokerage firm Citi has maintained a ‘Buy’ rating on Zomato post Blinkit deal with the target price of Rs 118.