A win-win for Paytm-Zomato shareholders? The deal holds promise for both NCR firms

The market sentiment has always been that it has spread itself too thin across multiple segments. Consequently, its stock has seen a jump today as it is selling its non-core business of entertainment ticketing on Zomato.

Overall, this seems like a win-win for shareholders of both companies. The market reaction on August 22 was not kind to Paytm. At around 3:15 pm, Paytm shares were down by 3.5 percent, while Zomato was down by 1.2 percent, while the overall market was up by 0.2 percent.

Impact on Zomato

As Zomato plans to launch its going-out app in the next few weeks, the acquisition is right in time to give its new platform a kickstart in terms of customer acquisition.

While the Paytm app and a couple of its sister apps continue to sell entertainment ticketing options over the next 12 months, the users will be gradually redirected and incentivised to switch to the ‘District’ app.

Zomato is cognizant of some additional spends that may be required to nudge Paytm customers to make the switch — but is confident that it can be done successfully. For this, it has re-hired two of its former senior executives (Rahul Ganjoo and Pradyot Ghate) who had worked on a similar project — the acquisition of Uber’s food delivery business by Zomato — several years back.

After Zomato acquired UberEats in 2020, the latter’s customers were directed to the Zomato app for a couple of months. The NCR-based food delivery platform also offered free Gold subscription to UberEats customers as a retaining tactic. During those days, Gold offered 1+1 free for eating out at participating restaurants.

Similarly, Zomato could likely offer insider customers extra discounts on the District app to retain those customers.

While Zomato’s dining-out business today is sizeable (as well as profitable) with an annualised gross order value (GOV) run-rate of over $500 million, its events ticketing business is relatively small.

"The latter business would have needed long gestation time to scale-up on an organic basis as it is networking and relationship driven and prone to exclusive contracting arrangements with event organisers. Moreover, the likely presence of formidable competition, (Bookmyshow and Paytm) would have only delayed its scale-up plans. We therefore believe Zomato’s acquisition of Paytm’s events ticketing business is a strategic fit," JM Financial analysts said in a note.

"The M&A also expands its horizon across complementary use cases. This coupled with the management’s strong demonstrated execution in the past across its previous B2C forays makes us believe that the proposed deal can significantly add value to Zomato’s stock," the note added.

Apart from the critical task of shifting user loyalty from one brand to another, Zomato would also need to build employee loyalty among the 280 Paytm staff who would now shift to the acquiring company as part of the deal.

In a shareholder letter yesterday, Zomato conceded that "On the people side, this acquisition is our first major acquisition where we are acquiring a team that we do not know very well (in Uber Eats acquisition we did not acquire any team and in Blinkit we knew the founder and team really well). We are betting on the team much more this time and hoping everything works out well. The main driver of success is going to be cultural integration of the new team that will join us – which means assimilation of the new team into our flattish culture”.

According to experts, the acquisition could help Zomato spruce up the movie ticketing and events business via an integrated loyalty programme, find a way to crosssell its food offerings, and create better discovery of entertainment options for users.

“At the end of the day, it is not a diagnostics lab that Zomato is acquiring… What it is doing is trying to get a bigger wallet share of the user’s lifestyle spends which is an area the company already plays in,” said Sreedhar Prasad, a former partner at venture capital firm Kalaari.

Zomato will bring an element of discoverability to the movie ticketing and events business—something that is currently missing. Typically, users first log on to a ticketing platform when they have already decided to watch a certain movie or attend a comedy show. They purchase a ticket and leave, without spending any time exploring what else is on offer.

“Zomato is better at making customers discover new things when they are on the app. More importantly, food and quick commerce have more frequency of use as opposed to a vanilla ticketing platform that you might visit only on the weekends,” said Prasad.

Zomato's bid to expand in the entertainment ticketing segment may also start a pricing war as it will compete with market leader BookMyShow which has been in the going-out business for nearly two decades. While the deal itself does not make a significant dent in Zomato’s cash pile of over Rs 12,000 crore, the execution hereon to attract customers and make them transact frequently might turn out to be a costly affair.

BookMyShow currently has an edge in the entertainment ticketing business with the segment having registered a revenue of Rs 800 crore in FY24, which makes up 70 percent of the company's total revenue of Rs 1,050 crore, pointed out Karan Taurani, Senior Vice-President Elara Capital.

On the other hand, Paytm's entertainment and ticketing business is estimated to be one-fourth the size of market leader BookMyShow. In terms of profitability, BookMyShow generates an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin of 13 percent versus Paytm Live’s 10 percent.

“Zomato’s live business, which is currently at an annualised run rate of Rs 400 crore, will move up by 75 percent to Rs 700 crore post this acquisition. We do not expect any major revenue or an earnings upgrade or a multiple re-rating for Zomato due to the above acquisition, as it has just 2.5 percent/4 percent positive impact on revenue/EBITDA, on a consolidated basis. But medium-term, the going-out business can become Zomato’s third largest B2C business, per management guidance,” said Taurani.

Impact on Paytm

Paytm closed the financial year ending March with operating revenue of close to Rs 10,000 crore, of which the events and ticketing business contributed to around Rs 300 crore, which is 3 per cent of the topline.

Meanwhile, the sale of assets is fetching the company almost 20 per cent of its annual topline or 25 percent of its cash balance by losing only 3 percent of the revenue. The additional cash buffer could not have come at a better time for Paytm. If the company grows its topline by 15-20 percent, the loss of topline will not be noticeable.

The company’s migration towards a third-party UPI app has been a drag on its payments market share, which has seen a 4-5 percent drop since April this year. This has forced the company to ramp up its marketing spending and cashbacks to lure customers to move to a new UPI handle as required by regulation.

For Paytm, this presents a great opportunity to monetise what is only an ancillary business with no great value addition to its core payments business, which has seen multiple shocks from the slowdown in the lending business as well as the regulatory restrictions on its associate company, Paytm Payments Bank, which held most of the licences for Paytm’s payments business.

Not losing much

Most payment apps work with travel and ticketing aggregator companies to integrate such bookings into their app. For instance, Amazon Pay has partnered with Bookmyshow and Makemytrip to offer movie tickets and travel bookings on its platform.

Similarly, PhonePe also has partnerships with Abhibus for bus ticket booking, Confirmtkt for train bookings, Makemytrip for hotels and Ixigo for flight bookings.

These payment apps earn an affiliate commission from these platforms. Paytm can integrate such partnerships on its platform within a few days and can offer similar ticketing experiences to its 10 crore users. The commission might be lower, but the customer experience will be similar to what Paytm customers might expect from the payments company.

“Probably, Paytm Founder Vijay Shekhar Sharma thinks that going vertical and very deep will again help the company become big like it was in 2020,” said a former Paytm executive, who runs a fintech startup now.

Paytm has also said that it is looking to cut expenses by up to Rs 500 crore. These ancillary businesses have low margins, a reflection of more staff managing these businesses.

“While these businesses can be big tomorrow, Paytm does not have the bandwidth to do the long-term game in adjacent businesses that might not help the company script an immediate turnaround. A private company would have had the luxury, not Paytm, especially not since early this year,” the executive added.

“The company can’t afford to reduce manpower in the payments business. It needs feet on the street to take on PhonePe, banks and Pine Labs which are aggressively targeting merchants for soundbox-like subscription devices. Paytm cannot show weakness now,” said a fintech consultant, who works with an auditing firm.

While Paytm is looking for a turnaround story with the additional cash balance, Goyal needs to prove his believers right once again with what seems like a costly acquisition

Zomato’s Goyal has provided a lifeline to Blinkit’s Albinder Dhindsa more than once. And that has proven successful for both the Gurugram entrepreneurs. Now, Goyal is extending a lifeline to another NCR company. Now, a lot of shareholders will expect Goyal’s fortune to rub off on Sharma too.