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Zomato may invest $ 100 million in Grofers as e-grocers shelves US IPO plan

Food delivery app Zomato is in talks to invest about $ 100 million in e-commerce Grofers, two people familiar with the matter, after discussions about a possible merger between the two fell through last year at the onset of the Covid-19 pandemic.

Zomato's investment will likely be part of a larger funding round and may value the Gurugram-based online grocery company at around $ 1 billion, the sources said. This time the talks focused on capital injection, unlike last year when Zomato was likely to acquire Grofers in a stock deal.

"Zomato has ambitions in the grocery sector and would like to partner with a specialty grocery company rather than building something of their own ... They want to stay focused on the food business," said a person familiar with the deal. The anonymity is due to the fact that the conversations are private.

Grofers, which was seeking to list on the high-tech Nasdaq in the U.S. through Cantor Fitzgerald's blank check company, as reported on Feb. 24, is expected to cancel its IPO plan and continues to maintain its privacy.

SoftBank Vision Fund (SVF), Grofers' largest shareholder with around 50% stake, was previously leading discussions on its IPO through a Special Purpose Acquisition Company (SPAC)

Grofers said: "We are in regular contact with the investor ecosystem and we are seeing great inbound interest given grocery as grocery is a primary need and a high growth sector. Due to the dynamic business environment, there will always be room for speculation, but our team is focused on serving more families. "

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A Grofers spokesperson added that the company is experiencing annual growth of around 110%.

Zomato had no comment as of this news release on Thursday.

Second shot

Zomato's investment in Grofers comes at a time when SVF is close to posting $ 450 million in competition Swiggy, largely to help the restaurant complex expand its services beyond delivering food.

Swiggy is powering grocery delivery platforms Instamart and Supr Daily in an effort to diversify.

With its US DoorDash IPO under its belt and a GoPuff rating amounting to $ 8.9 billion, SoftBank has delivered good round-the-clock returns for the on-demand delivery category for its global portfolio companies.

Zomato, which has experimented with grocery delivery during the first months of the pandemic, has discontinued its services under Zomato Market saying it is not the core of its business. "We did the grocery business because the food delivery business disappeared during the lockdown. For 3-6 months, it worked very well and helped us get through the crisis. In the end, it just didn't make sense ..." Deepinder Goyal said, co-founder and CEO of Zomato,

On April 28, Zomato submitted its IPO prospectus to the Securities and Exchange Board of India, seeking to raise more than $ 1 billion through a pool of new shares and by selling existing shares.

Zomato said it intends to raise Rs 8250 crore (approximately $ 1.1 billion) through its public listing.

The company led by Deepinder Goyal said at the IPO filing that acquisitions will be a key strategy for the company. While groceries are a low-margin business, Zomato's investment in Grofers could help it expand the vertical quickly by combining forces in a highly competitive industry that includes big players like Amazon, BigBasket-Tata, Flipkart, and Reliance JioMart, with pockets deep. Now, it will also do business with Swiggy, who has come up with a strategy to boost grocery sales.

Competition hots up

For Grofers, a recent round of investment will help him build a much-needed war fund in a market experiencing increasing competition and a massive surge in demand in the wake of the second wave of Covid-19.

Competition in the industry is fierce, the latest being the approval by the Competition Commission of India of a proposal from Tata Sons to acquire a majority stake in BigBasket, the industry leader.

Another person familiar with the matter said: "Now that the company has decided to shelve its initial public offering, it is looking to acquire about $ 200 million."

We could not immediately determine which other investors would likely join Zomato in the Grofers funding round.

The online grocer company was considering between $ 400 million and $ 500 million through its listing on the Nasdaq high-tech exchange, which was scheduled for this month with a potential valuation of more than $ 1 billion.

The Grofers reportedly merged with one of Cantor Fitzgerald's SPAC vehicles. The New York-based non-bank corporation is headed by former India-born Deutsche Bank co-CEO Anshu Jain, who is its president.

Grofers recently said that it currently has an operating rate of $ 1 billion in Annual Gross Merchandise Value (GMV).

For the fiscal year 2020, it posted an operating income of Rs 2,289 crore on losses of Rs 1,181 crore, news portal Entrackr reported.

The operating rate is a term used to measure the financial performance of a company if its current results will also continue in the future.

BigBasket said it surpassed the $ 1 billion annual operating rate in September last year, driven by rising demand for online groceries due to the pandemic.

Supermarket Grocery Supplies, the intercompany trading arm of BigBasket, posted revenue of Rs 3,322 crore with a loss of Rs 611 crore for the 2019-20 fiscal year, according to regulatory documents obtained from Business Intelligence Platform

Innovative Retail Concepts, which operates BigBasket's online retail business, posted revenue of Rs 3,418 crore on losses of Rs 424.3 crore in the same period.

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