Why are investors unhappy with the Blinkit acquisition by Zomato

In just 3 days since the Blinkit acquisition was announced, the stock of Zomato is down almost 19%, losing value on all the three days. What exactly is the reason that the stock markets are so unhappy with the Zomato Blinkit deal. After all, through the stock swap deal worth Rs4,447 crore,

Zomato will gain leadership positioning in the food delivery and the quick commerce space. However, markets contend it may not be that simple. Why are investors unhappy with the Zomato Blinkit deal
 

Why are investors unhappy with the Zomato Blinkit deal?

To begin with both are loss making companies and burn cash on a regular basis. The intent was that the combination of food delivery and quick commerce will work like a magic potion to assuage the concerns in the market. But, here is why the markets are unhappy.

1) First and foremost, people are worried that the deal was not entirely at arm’s length. After all, the promoters of one of the companies is married to the co-founder of the other company. It is just too much within the family and that is what makes the markets so uncomfortable with this deal.

2) There is the concern over equity dilution of Zomato, which is the listed company on the bourse. The total dilution of equity of Zomato as a result of the stock swap is to the tune of 8% of capital and that is quite a bit of dilution of equity capital and also of earnings. That is likely to put pressure on future per share economics.

3) Zomato acquisition of Blinkit for Rs4,447 crores does look like a steep price to pay for an emerging business like quick commerce which is yet to prove itself as a viable standalone model. Many quick commerce outfits are getting fancy valuations but the proof of any profitability is still very elusive.

4) While Zomato will issue 62.9 crore fresh shares to buy Blinkit in a stock swap, Zomato will also take over debt of Rs1,125 crore it had extended to Blinkit earlier this year. If you add up the debt assumption and the investments to cover losses of Blinkit, the actual price paid by Zomato is closer to Rs7,447 crore.

5) As per current estimates, and it could still be wrong, Zomato will have to fund Blinkit losses to the tune of Rs12,219 crore before it can turn to profits. Even after that, the profitability is more of a hope. All this has to be done at a time when Zomato is still far away from making profits, so it will be actually depleting its capital to fund losses.

6) Let us look at some real numbers. For the financial year FY22, Zomato burnt Rs693 crore of cash, which is lower than Rs1,018 crore in FY21. Blinkit had reported losses of Rs6,127 crore for the financial year FY21. It appears to be a clear case of too much of hype around a concept called quick commerce that is yet to prove itself in the real world of profits. Also, the main concern for shareholders is that when Zomato is already burning cash, it has bought another company that is burning cash twice as fast. After all, two negatives always don’t make a positive.