Flipkart to spin-off PhonePe, payments firm to be valued at $5.5 billion

Move will help PhonePe access dedicated, long-term funds for its growth plans. In this financing round led by Walmart, PhonePe is raising $700 mn primary capital at post-money valuation of $5.5 bn

E-commerce giant Flipkart is doing a partial spin-off of PhonePe, India’s largest digital payments platform. The move will help PhonePe access dedicated, long-term capital to fund its growth ambitions including going public by 2023.

In this financing round, PhonePe is raising $700 million in primary capital at a post-money valuation of $5.5 billion from existing Flipkart investors including Tiger Global, led by Walmart, the world’s largest retailer, according to the industry sources. They said PhonePe’s pre-money valuation is $4.8 billion. The fresh funding would come to PhonePe in two tranches of $350 million each.

“In this round, there is no secondary sale of equity by Flipkart,” said a person familiar with the matter. “The spin-off move would now allow the money from investors to come directly to PhonePe, unlike in the past when it had to be routed through Flipkart.”

The funding would help PhonePe to compete with rivals such as Google Pay, Amazon Pay and Alibaba-backed Paytm. It would also help the company to hire around 700 people, expand financial services and build solutions for small and medium businesses.

“Flipkart and PhonePe are already among the more prominent Indian digital platforms, with over 250 million users each,” said Sameer Nigam, founder and CEO at PhonePe. “This partial spin-off gives PhonePe access to dedicated long-term capital to pursue our vision of providing financial inclusion to a billion Indians.”

In just four years since its founding, PhonePe has crossed the 250 million registered user milestone, with over 100 million monthly active users (MAU) generating nearly one billion digital payment transactions in October 2020. It is targeting to cross 500 million registered users by December 2022.

Recognising the momentum that has been achieved, as well as PhonePe’s significant growth potential, Flipkart’s Board determined that this was the right time to partially spin-off PhonePe so it can access dedicated capital to fund its long-term ambitions over the next three to four years.

The partial spin-off also provides PhonePe with an opportunity to constitute a new Board of Directors focused on supporting its development. According to the sources, Flipkart co-founder Binny Bansal is joining an independent board that is already being formed by PhonePe along with the company co-founders Sameer Nigam and Rahul Chari.

“Binny Bansal is being roped in based on the relationship he has with the company founders,” said a person.  “Also, many top fintech and banking, financial services and insurance experts would be part of this independent board.”

It would also create a tailor-made equity incentive or ESOP (employee stock ownership plan) programme for its employees. All the 2200 employees at PhonePe including recently hired staff would be provided ESOPs, according to sources. They said most of the existing employees had Flipkart ESOPs, but those would now be converted into PhonePe stocks.

However Flipkart will remain PhonePe’s majority shareholder, and the two businesses will retain their close collaboration.

“As Flipkart commerce continues to grow strongly serving the needs of Indian customers, we are excited at the future prospects of the group,” said Kalyan Krishnamurthy, CEO of Flipkart Group. “This move will help PhonePe maximise its potential as it moves to the next phase of its development, and it will also maximise value creation for Flipkart and our shareholders.”

PhonePe came to Walmart as part of the US retailer’s $16-billion acquisition of e-commerce firm Flipkart in 2018.Doug McMillon, president and chief executive officer, Walmart, which owns PhonePe and Flipkart recently said during retail company’s earnings results, that in India, Flipkart and PhonePe had strong results for the quarter. He said the number of monthly active customers on these platforms is at all-time high.

Analysts said the fresh funding is a big relief for PhonePe, which was out in the market for a long time to raise a large funding round of about $1.2 billion. However there were challenges including data policies, slow down in the investment environment and coronavirus pandemic.

According to the sources, PhonePe has started gearing up for an initial public offering (IPO) by 2023 and is eyeing a valuation of $7-10 billion. It is deepening its penetration into financial services, whose size could touch around $340 billion in the next few years. This is going to play a key role in the firm becoming profitable and going public. It may do it in the US or India, depending on market conditions.

Highlights:

PhonePe is raising $700 million at a $5.5 billion valuation from existing Flipkart investors led by Walmart.

Flipkart co-founder Binny Bansal is joining an independent board along with PhonePe co-founders Sameer Nigam and Rahul Chari.

In just 4 years since its founding, PhonePe has crossed the 250 million registered user milestone.

It is targeting to cross 500 million registered users by December 2022.

All the 2200 employees at PhonePe including recently hired staff would be provided ESOPs.

Most of the existing employees had Flipkart ESOPs, but those would now be converted into PhonePe stocks.