E-commerce foes click with merger deal - TechCentral

E-commerce foes click with merger deal

Duncan-McLeod-180-profileTwo of South Africa’s biggest online retailers, Takealot.com and Kalahari.com, surprised just about everyone this week when they announced plans to merge their operations. The proposed deal is surprising because, until now, these two companies have been going hammer and tongs at each other for dominance of the still relatively young e-commerce market.

The man at the centre of it, Kim Reid — a former Naspers senior executive and now Takealot CEO — has been talking about building an e-commerce giant in South Africa for several years now. As far back as 2011, he promised he was going to build Takealot into a R1bn-revenue business.

The deal between the two e-retailers is being billed as a true merger. Media and e-commerce group Naspers, which owns Kalahari, will fold the company into Takealot and take a 41% equity position in the company from its current majority shareholder, Tiger Global Management, an international technology investment company headquartered in New York.

Tiger and Naspers will then be equal shareholders. It’s not clear which entity will have effective control — if either — but it is perhaps telling that the Kalahari brand is being ditched in favour of Takealot, even though Kalahari traditionally has had the stronger brand of the two.

The tipping point that led to this deal can be traced back to May, when Takealot dropped the bombshell that it had raised US$100m (more than R1bn) from Tiger Global Management. Tiger Global took control of Takealot in 2011.

Tiger has invested in a number of Internet businesses in emerging markets, including China, Brazil, Russia, India and South Africa. Its other South African investments have included online auction site Bidorbuy and Private Property Listings. Tiger was an early investor in both LinkedIn and Facebook.

When Tiger’s $100m injection into Takealot was announced, Reid said the e-retailer would use the money to play a much more aggressive role in South Africa’s e-commerce space.

As many as three years ago, it was already evident that Reid, who took a 15% equity stake in Takealot with the Tiger investment, had big plans for the business. He said in an interview then that within five years he intended building Takealot’s revenues to over R1bn (from R75m then). The Kalahari deal, if regulators allow it, must surely take Reid much closer to his target.

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“We have agreed on the capital expansion and the money has been raised and we are now funded to grow as we choose,” Reid said at the time of Tiger’s $100m investment.

He said Takealot had enjoyed growth in excess of 100%/year and wanted to increase that growth rate. “If you look at the size of the market right now, there is a R550bn opportunity in which e-commerce is only just beginning to play a role,” he said.

The decision to merge, Takealot and Kalahari said in a joint statement on Tuesday, was driven by the fact that, without scale, South African e-retailers “simply can’t compete successfully against the local brick-and-mortar retailers and foreign companies such as Amazon and Alibaba”.

“After many years of losses on Kalahari and four years [of losses]on Takealot, we realise we have to work together if we are to survive and prosper,” a spokesman for Kalahari said in the statement.

The comments are probably directed, at least in part, at South Africa’s competition authorities, which must satisfy themselves that if they allow the deal to proceed it won’t harm consumers or lead to a monopoly in online retail.

It’s difficult to see how it would have a negative impact. Kalahari and Takealot aren’t the only generalist online shopping websites in South Africa, and online retailers must still compete with bricks-and-mortar stores and with international e-commerce companies like Amazon. And online retailers, according to Takealot, account for only 1,3% of retail sales in South Africa, against as much as 14% in some developed markets.

No, this merger isn’t so much about creating a monopoly. It’s more about building an early and clear lead in a market that is set to boom in the coming years.

  • Duncan McLeod is editor of TechCentral. Find him on Twitter
  • This column was first published in the Sunday Times

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