Alibaba Cult Spreads, Micromax a Disciple

alibaba nyse flagMicromax is on the verge of signing an agreement to sell a fourth of itself to China’s Alibaba for about $700 million (Rs 4,200 crore), according to three persons aware of the matter, in what will be the first such stake purchase in an Indian phonemaker by an overseas investor.

The deal involves the sale of a stake of 20-26% to Alibaba Group Holding, the owner of China’s leading online payment solutions company Alipay, allowing it to gain entry into one of the world’s fastest-growing handset markets. The transaction is likely to value India’s No. 2 handset maker at around $3.5 billion (Rs 21,000 crore) inclusive of debt, one of the three persons said. An announcement is expected shortly.

The legal documentation is getting finalized and may be wrapped up in a fortnight.

One of the persons said the deal may value Micromax at as high as $5 billion. The deal may also see the participation of Japan’s SoftBank, which has a 32% stake in Alibaba, the person added.

Citigroup is advising China’s largest e-commerce firm Alibaba and Japanese internet and telecom powerhouse SoftBank while Micromax is being advised by Goldman Sachs. Alibaba, SoftBank and Micromax declined to comment on what they termed market speculation. “SoftBank and Alibaba will invest jointly in Micromax in what’s known as a comingled fund,” said one of the persons.

Partners don’t need to reveal their individual investments in a comingled fund. SoftBank’s stake in Alibaba is valued at roughly $50 billion. ET was the first to report on Micromax reaching out to Alibaba and SoftBank for a possible deal in its February 23 edition.

At the time, people aware of the matter had said that any deal would see the infusion of capital and exits, partial or total, by existing investors. This will give existing investors significant returns on their investments.

TA Associates, for instance, has a 15% stake in Micromax that it bought for around Rs 225 crore five years ago when the company was valued at aroundRs 1,500 crore.

The promoters of Micromax were said to have been seeking a valuation of $3-3.5 billion, which is 2.5-2.9 times the FY14 total income of Rs 7,142 crore ($1.1 billion) as per filings with the Registrar of Companies (RoC). It posted earnings before interest, taxes, depreciation and amortization (EBITDA) of Rs 439 crore and profit after tax of Rs 284 crore in FY14.

Alibaba’s India play

Alibaba has been making its presence felt in India. In February, Ant Financial Services Group, an affiliate of Alibaba, purchased a 25% stake in One97 Communications, which owns mobile payments platform Paytm.

The acquisition is in line with the company’s strategy to tap the mobile payments business as more people conduct transactions through handsets.

The four founders of Micromax — Rahul Sharma, Rajesh Agarwal, Sumeet Kumar and Vikas Jain — own a little less than 80% of the company while the rest is held by private equity funds and employees.

The stake sale will help Micromax raise capital as it expands into new areas, including personal computing. Investors — strategic and financial — are eyeing the ecosystem that comes with hardware as more transactions go mobile. This will allow them to customize apps and other services to push sales on their platforms.

Micromax shelved public offer plans last year and decided to seek capital from strategic investors as it is fairly cash-rich, with revenue of more than Rs 11,000 crore at the end of FY15. Founded in 2000, Micromax started selling mobile phones in 2008 and is now the country’s biggest after Samsung with a 14.4% share in the three months ended March, as per International Data Corp.

The company sells about 3 million mobile phones every month, of which a little over half are smartphones, making it the 10th largest mobile phone company in the world by volume in the quarter ended March, as per research firm Gartner. Micromax is present in all markets of the South Asian Association for Regional Cooperation besides having gained a foothold in places such as Russia. It aims to enter more overseas markets.

Tapping internet boom

Micromax devices are built around the Android operating system but the company recently entered into an exclusive partnership with US-based operating system maker Cyanogen for Cyanogen-Mod, the OS for handsets under its new Yureka brand.

A deal with Micromax will help the Chinese e-commerce giant tap into the boom in internet usage in India. With e-commerce reaching peak levels in its home market, Micromax will help Alibaba counter competition from peers such as Moreover, Alibaba would be able to roll out services such as Alipay, its online payments platform, on Micromax phones.

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