12/03/2015 4:25 PM IST | Updated 15/07/2016 8:25 AM IST

Why Snapdeal's Talks To Acquire Freecharge Make Sense

Chairman of Japanese mobile carrier SoftBank, Masayoshi Son, speaks about the company's investment over Indian leading online marketplace during a press conference in Tokyo on November 4, 2014. SoftBank said net profit in the first six months of its fiscal year jumped by more than a third, thanks to a five-billion-USD gain from its stake in Chinese e-commerce giant Alibaba. AFP PHOTO / TOSHIFUMI KITAMURA (Photo credit should read TOSHIFUMI KITAMURA/AFP/Getty Images)

Online marketplace Snapdeal is in talks to acquire Freecharge, the mobile recharge and discount coupon provider, for $450 million (Rs 2,800 crore) according to a report in The Economic Times.

Gurgaon-based Snapdeal has been aggressive in acquiring companies since it raised a whopping $1 billion (Rs 6,200 crore) last year, out of which Softbank invested $600 million (Rs 3,800 crore). That was similar to what Flipkart raised last year from Tiger Global, Naspers and Temasek. Amazon has said that it will pour in $2 billion in its India operations, making this a hugely competitive market where investors are eager to invest.

If the deal goes through as is being speculated, it would be the largest deal in the e-commerce space in India, trumping Flipkart's $370 million acquisition of Myntra in May 2014. This would continue consolidation in a sector that has seen high valuations along with big losses at companies trying to lure buyers with hefty discounts.

Bangalore-based Freecharge raised $80 million in February, largely from Hong Kong-based Tybourne Capital Management and Valiant Capital. The company was founded in 2010 by Kunal Shah and Sandeep Tandon. Sequoia Capital has also invested in the company.

Freecharge is very popular — with about 20 million users — and offers restaurant coupons in exchange for the amount recharged online. It wants to grow to about 40-60 million users. The acquisition makes sense as both companies act as marketplaces to bring buyers and sellers together. Freecharge brings in mobile users to recharge pre-paid and post-paid mobile phones online and rewards them with discount shopping coupons. Snapdeal will get access to a large group of consumers and have more firepower to take on Flipkart and Amazon.

Snapdeal, which acquired five companies last year, is looking to buy a similar number this year. The Freecharge deal would be its first for 2015. It is also reported to be in talks to raise another billion dollars from Chinese e-commerce major Alibaba.

Both investors and companies are seeking leadership in India, where the e-commerce market is expected to quadruple to $43 billion in 2018 from $10 billion in 2013 according to a July 2014 report by Japanese bank Nomura. This explosive growth is likely to be driven by online retail, which the bank projects to grow to $23 billion in five years from $2 billion in 2013.