The clock is ticking for ShopClues, as it waits for the outcome of its discussion with Snapdeal. Two months ago, Entrackr was the first to report about ShopClues’ probable acquisition by the SoftBank-backed firm.
Multiple Entrackr’s sources close to the company indicate that the process which has been going on for a few weeks is about to wrap up. While the due diligence is expected to make a comprehensive assessment, legal concerns may potentially bedevil the sale. As in all such cases, complex litigation with large contingent liabilities is always a risk that any new owner will be reluctant to assume without adequate indemnities.
The continuing legal cases involving co-founder of ShopClues, could also potentially cast a legal shadow on any transaction.
Based on the findings of the due diligence, Snapdeal will take a definitive call on whether it will proceed ahead and on what terms. If the deal goes through, Snapdeal would likely need to make an emergency infusion of funds to keep the operations at ShopClues going till the transition can be completed.
However, if the due diligence findings lead Snapdeal to walk away, then ShopClues could be in real trouble.
Multiple sources from the company tell us that the company owes large amounts for the marketing it has done through platforms like Google and Facebook. While both companies continue to extend credit to ShopClues in the hope of recovering their dues, lack of a deal is likely to lead to an immediate end to any further marketing on these platforms, which will cripple the residual sales, already down to less than 15,000 orders per day.
Similarly, the seller dues have been mounting for some time. Between third-party sellers and its private labels, the liabilities are to the tune of Rs 100 Crores. While most established sellers have already withdrawn their merchandise, the absence of a deal will lead to financial chaos at ShopClues. Delayed settlements will cause litigation, which will make the company less attractive for any other potential suitor.
Similar stress is likely on account of amounts payable to other service partners, including logistics companies, who are already holding back some Cash on Delivery (CoD) receipts to protect themselves against unpaid bills.
Entrackr has sent detailed queries to ShopClues. We will update the post as and when it responds. Snapdeal declined to comment.
Precisely because ShopClues has no financial reserves to ensure an orderly winding down of the business, it will try its best to ensure that the deal with Snapdeal goes through. It simply does not have the time or financial cushion to wait out for another round of due diligence by other suitors.
However, as a fallback measure, the investors are likely to explore merging ShopClues with other niche platforms like Craftsvilla, Voonik or Limeroad, who are financially stable and may have common investors with ShopClues. Or one of the other large e-commerce companies like Amazon or Flipkart may buy the company at a throwaway price, hoping to salvage something, though that seems like an unlikely outcome given the company may bring a lot of baggage to these US-owned companies that have a very high degree of sensitivity to any diligence issues.
To prepare for a probable event of Snapdeal deciding not to go ahead, ShopClues’ investors must be lining up alternate buyers to avoid a meltdown.
Due to the uncertainty, any offer of purchase is likely to run into the vexed issue of valuation of the shares held by different shareholders. According to sources close to the matter, despite weeks of internal discussions, there is no consensus amidst ShopClues shareholders about the basis of allocation of any shares that may be received. This is due to the complexity of varying liquidation preferences amongst shareholders, which gives them differential rights in an exit.
While most investors are willing to accept whatever they can get, a couple of investors (not identified) are holding back this settlement with the aim to drive a better deal for themselves.
Each day this deal gets delayed is another day closer to a financial crisis for ShopClues, and if these investors do not agree to any terms that Snapdeal sets in case the deal goes through, it will probably lead to a bigger loss for everyone.
*All sources requested anonymity as these discussions are private and they aren’t authorized to speak to media.