Zomato Acquisition To Bolster Going-Out Business

BUY

Information Technology  

Company Update  

August 22, 2024

TARGET PRICE (Rs) : 270

Zomato has announced the acquisition of Paytm's entertainment ticketing business for a cash consideration of ~Rs20.5bn (~1.0x trailing EV/FY24 GOV). The acquisition gives size and scale to Zomato's ‘going out’ business, acting as an additional growth engine over the medium-to-long term. It also lends credence to the company's aim of building a one-stop destination for ‘Going-out’ and would be part of the new ‘District’ app (to be launched in the next few weeks). Mgmt. believes that going-out experiences will continue to see strong growth, with overall growth in lifestyle and consumption. Post-acquisition, the management estimates going-out GOV at >Rs100bn in FY26. Mgmt. expects the going-out business to operate near break-even on adjusted EBITDA basis, while potentially delivering 4-5% adjusted EBITDAM as a % of GOV over the medium-to-long term. Mgmt’s strong execution track record grants confidence that going-out will add further value over the long term. We will consider the acquisition in our estimates after deal closure. We retain BUY with TP of Rs270.

Deal contours

Zomato has entered into definitive agreements for purchase of Paytm™s entertainment ticketing business, including movies, sports, and events (live performances) ticketing for ~Rs20.5bn. As part of the agreement, Zomato will enter into a Share Purchase and Subscription Agreement (SPSA) with One97 Communications (OCL), Wasteland Entertainment Private (WEPL), and Orbgen Technologies Private (OTPL), to acquire their entertainment ticketing business. As part of the transaction: 1) OCL movies and events ticketing businesses will be carved-out and transferred by way of slump sale to OTPL and WEPL, which operate the TicketNew and Insider platforms, respectively. 2) Zomato will do a primary infusion into OTPL and WEPL for an amount equal to the slump sale consideration, which will be used to discharge the consideration payable to OCL for the slump sale. 3) Simultaneously, Zomato will acquire 100% stake in OTPL and WEPL from OCL. 4) Post-deal closure, OTPL and WEPL will become wholly-owned subsidiaries of Zomato. The transaction is expected to be completed within 90 days of the execution of SPSA. As part of the transaction, ~280 employees will move to Zomato.

Expanding Going Out Presence

Zomatoâ going-out business comprises of two main segments: a) Dining-out, which includes discovery, table reservation, and transactions for dining-out across restaurants in India and the UAE. b) Zomato Live, which includes discovery and ticketing of events in India. Zomato™s going-out segment reported annualized GOV of ~Rs50.7bn in Q1FY25 with 0.8% adj. EBITDAM as a % of GOV. The acquisition of Paytm’s entertainment business will bolster Zomato’s going-out business. In FY24, the acquired business generated a combined GOV of >Rs20bn (29% YoY growth) by enabling purchase of 78mn tickets by >10mn unique customers on its platform. The acquired business reported revenue of ~Rs3bn and adj. EBITDA of ~Rs0.3bn in FY24 (translating into ~1.5% adj. EBITDAM as a % of GOV).

Plan to launch new app”District

Zomato plans to launch new app District™ in the next few weeks, to cater to use cases like booking movie tickets, IPL tickets, dining-out table reservations, discovering live entertainment, booking weekend getaways, etc. Following this acquisition, the going-out business would be spread across multiple different platforms: 1) Zomato™s existing going-out business would continue to run on the Zomato app, and 2) the acquired business (movie + sports + event ticketing) would continue to run on Paytm's main app (for a transition period of up to 12 months), along with Insider and TicketNew apps. In the short term, the District app will duplicate the offerings above and over time; it will gradually nudge customers to move to the District app.