Food for thought: Zomato's promise of an IPO, bigger market

Making hay while the sun is bright has made agrarian sense for ages, before the arrival of the greenhouse for growing plants and of the animal feed industry for industrial farms. Modern food-tech and the hyperkinetic media world are as far removed from the farm and the field as potato chips are from silicon chips. But making hay while the sun shines is exactly what we see in the proposed public offers by Zomato, a food-tech unicorn (a unicorn, outside the world of Greek myth, is an unlisted company, typically a start-up, valued more than $1 billion) and Seven Islands Inc., a media venture by Uday Shankar, former boss of Star TV in India, and James Murdoch, Rupert Murdoch’s son who quit News Corp on account of his differences with the group’s ultra-conservative views.

The net result could well be consolidation as well as expansion in India’s media landscape, a more ambitious Zomato, whose aroma of success is likely to inspire yet more food tech start-ups, and a larger pool of venture capital, as major investors in Zomato unlock the value of their early investments in the company, offloading a part of their stake as part of the IPO.

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The world is awash in liquidity, yields are at rock bottom — the yield on 10-year US treasuries has climbed to 1.69 per cent from 1.1 per cent just months ago and has caused turmoil in the markets: people have dumped stocks to invest in bonds, the concentration of tech companies in US indices has led to the sell-off to become a tech sell-off, nervousness over market volatility has led some portfolio investors to pull back from emerging markets; and bears who have shorted the market are struggling to hide their glee. But the yield on 10-year US government bonds is still only 1.7 per cent, far below the trend rate of 4.36 per cent.

No central bank carrying out quantitative easing, that is, buying billions of dollars worth of bonds every month, has stopped buying bonds, leave alone started selling them to suck out liquidity. Capital is available cheap. This is still the right time to raise money from investors, whose painfully low returns from fixed income sources are forcing them to turn ever more to equity, whether through pooled savings, exchange traded products or individual equities brandishing their charms through social media posts.

Seven Islands Inc is raising money for a Special Purpose Acquisition Company (Spac). Spacs ride on their sponsors’ credibility, their ability to meet the promise of finding and acquiring unlisted companies that want to avoid the cost and hassle of going through an initial public offering to get listed. When an unlisted company merges with a listed company, the process is called a reverse merger. The assumption is that the Spac sponsors would be able to identify uncut gems and turn them into dazzling successes.

The Spac that Uday Shankar and James Murdoch plans to create will raise 300 million, via 30 million units of $10 each, each unit comprising a share and one-fourth of a warrant exercisable at $11.50 – a warrant will have an expiry period and if exercised before that, can fetch the holder a share at that price. So, if the Spac finds companies to buy that inspire investors in the firm, the money raised would be a fourth higher than the original $300 million.

Seven Islands could spell media consolidation in India, besides in East and Southeast Asia. News media in India have foreign investment caps: in television, it is 49 per cent and 26 per cent in digital media. However, if foreign investment in an entity is below 50 per cent, it is considered an Indian entity. FDI restrictions can be circumvented by investing through a series of technically Indian companies, the ultimate beneficial ownership of the operating entity being significantly more foreign than its immediate shareholding suggests.

Remember that when Hutchison sold its stake to Vodafone in the Hutch-Essar telecom joint venture in India, the beneficial ownership it declared abroad turned out to be far higher than the statutory ceiling then prescribed for FDI in telecom. All a foreign company needs is a series of Indian worthies willing to act as its proxies, holding equity on its behalf, bound by contractual obligations to vote on the company board according to the foreign company’s wishes and pass on dividend earnings as prescribed.

Foreign banks can extend loans to Indian companies on the say-so of their relationship with the foreign sponsor of the Indian company, so that the combined share of debt and capital that an Indian media company employs, while complying fully with FDI norms, could be significantly higher than the direct FDI cap laid down. Seven Islands promises to reward Indian entrepreneurs in the media space and consolidation of the fragmented space. But those who sell out to Seven Islands could start fresh ventures, keeping the media space sufficiently varied, after a gap.

It could well mean greater opportunities for creative people as well, as there are no FDI limits on entertainment media. As and when 5G becomes a reality in telecom, broadcast media would face additional competition from a variety of streaming media. Not that to stream media without stuttering calls for 5G speeds: India got 3G speeds only with the mainstreaming of 4G, and reasonable 4G speeds will become standard when 5G rolls out.

Indians love their entertainment in their mother tongue and non-news media in India’s many regional languages could see a big boom. Languages that today are derogated as dialects could come into their own and cultural production in them could bloom. The audience for Bhojpuri, for example, would be larger than the global audience for German, even if with a significantly lower purchasing power. From Coorg to Mizoram, small linguistic groups could seek reinvigoration of their sub-cultures. One of the biggest growth stories in online language courses during the pandemic has been that of Welsh, normally considered a language on its deathbed, and to learn which, the Prince of Wales had to take one-on-one tuition with a Welsh separatist.

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Zomato’s success in raising its planned ₹8,250 crore would help it tide over the pandemic-inflicted setback it has received to growth. However, the pandemic has helped it cut costs and raise margins, as well. Its competition with Swiggy would intensify. Who knows, with the firepower the IPO provides, it could enter into related business lines, such as the supply chains that restaurants rely on, supplying quality ingredients with proven traceability, or even synthetic meat that does not taste like soya nuggets.

Info Edge stands to get ₹750 crore from selling a stake in Zomato, giving it resources for fresh investment in new start-ups. Indian start-ups are constrained by a paucity of venture capital. Profitable exits of early investors in companies going public are the best way to grow venture capital.

When the sun shines, it does not reserve its warmth for any one set of haymakers.