Zomato-Paytm deal: A win-win situation for both, but deal's success depends on multiple factors

Zomato, the online food delivery platform, announced on Wednesday, August 21, that it will acquire Paytm's entertainment ticketing business for ₹2,048 crore to strengthen its "going-out" segment in a deal that will help the troubled fintech firm sharpen its focus on core payments and financial services distribution. Paytm's entertainment ticketing business covers movies, sports, and events (live performances).

Shares of Zomato on Thursday opened 1% higher at ₹262.55 apiece on the BSE while One 97 Communications Ltd, the parent firm of Paytm, was trading over 5% higher at ₹603.15.

In a letter to shareholders, Zomato said that in FY24, the business being acquired generated a combined GOV (gross order value) of ₹2,000+ crore (29% YoY growth) by enabling the purchase of 78 million tickets by 10+ million unique customers on its platform. During the same period, the business generated revenue of ₹297 crore and adjusted EBITDA of ₹29 crore (translating to about 1.5% adjusted EBITDA margin as a percentage of GOV).

"The business is being acquired for a total consideration of ₹2,048 crore (subject to any changes in cash and net working capital as at closing). The transaction also includes a transition services agreement where the ticketing business will continue to run on the Paytm app for a period of up to 12 months to ensure a smooth transition of the business from Paytm to Zomato," the letter added.

As part of the transaction, nearly 280 employees will move to Zomato. There is no other major physical infrastructure being acquired, the company said further.

What does this deal mean for both companies?

The agreement is seen as a win-win situation for both companies; however, with Zomato foraying into the entertainment ticketing business, it will intensify the competition in the segment, with BookMyShow already in the business for nearly two decades.

BookMyShow is backed by Reliance Industries (RIL), which, as per publicly available information, holds a 37% stake in the company. Other existing investors include Accel, Elevation Capital, Stripes Group, and TPG Growth.

Zomato will operate this through a new app called 'District', which will be its dedicated going-out app.

Commenting on the deal, Amit Kumar Gupta, a SEBI-registered research analyst and founder of Fintrekk Capital, notes that the valuation of Paytm’s ticketing business acquisition looks compelling in the context of the growth forecast. "But this is in direct competition with BookMyShow, so one needs to see how it is scaled up," Gupta says.

As regards the valuation, Zomato said it was acquiring the said business at nearly 1.0x trailing enterprise value/FY24 GOV multiple, which it believes is fair vis-à-vis the relative valuations of other comparable companies.

"Further, as a measure of good governance, we have also obtained a fair valuation report from KPMG on the valuation of the target business. Kotak Mahindra Capital Co. Ltd. acted as a financial advisor to Zomato and has also given a fairness opinion confirming that the valuation of the target business is fair from a financial point of view," it said.

Sonam Srivastava, Founder and Fund Manager at Wright Research, opines that the proposed acquisition of Paytm's entertainment ticketing business by Zomato has significant implications for both companies.

"Zomato could benefit from entering a new market segment, increasing user engagement, and potentially realising synergies with its existing business. For Paytm, the sale could allow the company to focus on its core competencies, monetise a non-core asset, and potentially invest in other strategic opportunities," the fund manager added.

However, the success of the deal will depend on factors such as valuation, integration challenges, regulatory hurdles, and Zomato's ability to effectively leverage the acquired business to drive growth, Srivastava added.

Other leading analysts, too, have welcomed the deal; however, they noted that the major concerns are integration and user migration.