InvestorQ : What has gone with the Zomato stock that it has corrected 19% in the last 3 days since it acquired Blinkit?
Juvina Maggie made post

What has gone with the Zomato stock that it has corrected 19% in the last 3 days since it acquired Blinkit?

Deepa Salunkhe answered.
2 months ago

If you thought that the marriage of Zomato and Blinkit was made in heaven, just think again. The market apparently things otherwise. Here is why the markets are sorely disappointed with the Zomato Blinkit deal, resulting in the stock being banged down 19% in 3 days.

a) The big worry is on the equity dilution. This merger is a stock swap, which means Zomato will issue fresh shares of Zomato to Blinkit shareholders. To that extent, the equity of Zomato also gets diluted. According to the company submission, Zomato will issue a total of 62.9 crore fresh shares for the Blinkit acquisition which will tantamount to an 8% dilution of equity capital base of Zomato. That will put pressure on the future per share economics of Zomato.

b) Markets are worried that the real cost is much more than the Rs4,447 crore that the company has claimed it is paying. For example, apart from the stock swap and the cash pay-out for the warehousing business, Zomato will also take over debt of Rs1,125 crore it had extended to Blinkit earlier this year. Then it is likely to sink in a couple of thousand crores to cover the losses of Blinkit. In short, the effective price paid by Zomato for Blinkit is actually closer to Rs7,447 crore.

c) The bigger question is how long will it take to profitability. Firstly, Zomato itself is loss making and has just about managed to come to a situation of narrowing its losses. Now it has to fund Blinkit losses to the tune of at least Rs12,219 crore before it can turn to profits; and even that is more of an optimistic estimate at this point of time. The question is what happens to shareholders of Zomato in this story. They look to be taken for a long haul of supporting losses of Blinkit. Zomato is still far away from making profits, so it will be depleting its own capital to fund losses.

The moral of the story is that Zomato is burning cash, it has bought another company that is burning cash twice as quickly. Two negatives cannot really work wonders?