This is an audio transcript of The Morning Brief podcast episode: “See you in court” BillDesk tells Prosus​

BG 0:01
This is the morning brief from the economic times.

Anirban Chowdhury 0:13
On Monday, Dutch investment firm process cancelled a $4.7 billion deal to buy Indian FinTech company Bill desk

BG 0:23
process, the parent company of FinTech major pay who has crapped its Mega $4.7 billion acquisition of Bill desk saying that certain conditions were not fulfilled. These conditions were to be fulfilled before the September,

Anirban Chowdhury 0:37
the move has sent shockwaves across India startup ecosystem, especially its FinTech companies. Process owned PayU, which is like the Indian version of PayPal was to buy Bill desk, one of the largest digital Bill processors in the country. The all cash deal was the second largest in India startup history. After Walmart's $16 billion buyout of Flipkart in 2018. The merger between PayU and Bill desk would have created the largest digital payments business in the country. It would also have been the biggest investment in India for process, which counts the country as its top investment destination. And now, the deal isn't happening anymore. The move is made the founders of Bill desk who wanted a rich exit through the sale. Very, very angry. On Wednesday, my colleagues Anand J and Mugdha Variyar who track FinTech and consumer internet at ET prime broke the latest development in this saga. Bill desk is now planning to take process to court Anand and Mugdha compared process move to Elon Musk's now in famous sudden withdrawal of plans to buy Twitter, and they compared Bill desks plans to go legal with Twitter's lawsuit to force Musk to buy it. Should India's startup space gear up for a big legal battle? Why was the PayU BillDesk deal nixed? And will it impact how deals in India startup and fintech space are valued from now on? Listen on. It's the sixth of October from the economic times. I'm Anirban Chowdhury. And today, we look at what led to the BillDesk versus process battle and what lies ahead. This is the morning brief. Hi, Anand. Hi, Mugdha. Very warm. Welcome to the Morning Brief.

Mugdha Variyar 2:33
Thank you Anirban.

Anand J 2:34
Thanks, Anirban. Happy to be here.

Anirban Chowdhury 2:36
So it's been quite a train wreck of news since yesterday, right? Process, planned buyout of BillDesk was a huge deal. And the nixing of it has shocked the FinTech and investor community alike. And now you're writing that Billdesk is planning legal action? Is this hitting you all too fast? I mean, how surprised Are you?

Mugdha Variyar 2:59
Now this definitely came as a surprise, I think to everyone in the ecosystem, it really came out of nowhere. And this includes employees at Bill desk and like we've written even at PayU India Anand I mean, I'm sure you also this was a shock to you. You've been covering this as well.

Anand J 3:16
Yes, correct. Yeah, we have spoken to a number of people for the story. And everybody was in absolute shock that this would happen at all. Primary premise being the deal was between two partners where they, they were not competing against each other, unlike other payment gateway companies. So this was a perfect match. But things happen.

Anirban Chowdhury 3:40
So your story had a very interesting headline, right? About a parallel between what's playing out between Elon Musk and Twitter to the whole PayU Billdesk saga? Why'd Why did you say that? I mean, what are the parallels you think?

Mugdha Variyar 3:55
No, there were definite parallels between the whole Twitter saga with Elon Musk and what happened with Bill desk and PayU and that's because one party was completely unaware of the other party's intention to walk away from the deal. And in fact, you know, just like in the Twitter saga where there is now a lot of acquisitions, and of course legal action between the two parties, we could see something similar with Bill desk and PayU as well because Bill desk, the shareholders, the founders believed that what pay you did was in bad faith that they walked away from the deal. It was a binding agreement and you know, they've decided to walk away and they are looking at legal action. And that's why the parallels ,

Anirban Chowdhury 4:40
obviously it wasn't always like this. So process, which is the investment arm of South African tech giant Naspers loves India, and is willing to put its money where its love is Prosus has so far invested more than $9 billion in the country's tech startups. Big names. food delivery app swiggy Ed tech company Byjus E pharmacy farm Easy and of course PayU last year Prosus told its investors that India's digital payments market will be a $2.6 trillion opportunity. That's more than the GDP of South Korea. Here's the Prosus CEO Bob van Dijk from an interview in 2020.

Bob van Dijk 5:26
But India is our as our top priority country when it comes to new venture investments as well. So we definitely look at areas that are new as a group in India because we think the market is really really attractive and entrepreneurs are some of the best that we that we meet.

Anirban Chowdhury 5:40
In September 2021 Prosus through PayU agreed to by Bill desk, it was a great fit. First, they aren't competitors PayU helps mostly small and medium sized companies to take digital payments. Bill desk, on the other hand, is one of India's largest Bill processors. It counts general Atlantic and Temasek among its backers and the country's government and its biggest banks as its clients. In fact SBI was one of Bill desks earliest investors bought a 9% stake in the company for nine crore rupees in 2006. Bill desk was then valued at 108 crore rupees by 2015, when SBI exited its valuation had risen to close to 4500 Crore Bill desk is profitable, while pay you is making losses, the combined entity would process over 147 billion dollars of transactions annually, by some estimates that would give it a reach to half of India's digital payments market. Naturally, the founders were happy, they in fact chose this deal over what would have been a very lucrative IPO. Here's one of Bill desks founders, M N Srinivasu from an interview last year,

M N Srinivasu 6:58
it just feels like a great sense of accomplishment for what the team has accomplished. And for the platform that we built. It is a validation of whatever we have created in India, I think it's extremely proud moment for all the employees from Billdesk, and indeed a big moment for FinTech India, choices were between IPO and kind of doing a transaction like this. We balanced both both those options, important to provide liquidity to the investors who have supported us for the last so many years, and figuring out what's the optimal thing to put in for the platform. As you're evaluating that I think the option of Prosus came up. And it was a great fit for us process by virtue of being both wearing the hat of both the financial investment and having strategic interests in the space in India, it seemed a great fit and the right way from to scale from here. I think that's what Bill trade favor of that.

Anirban Chowdhury 7:50
And here's, Anand again,

Anand J 7:52
so this was a big deal, this would have created a big company that is miles ahead of its nearest competitor for PayU India, which was started by Prosus, this could have given them a clear edge ahead of companies like you know, Razorpay there are new entrants, but formidable rivals, such as Pine labs, and Just pay and all that. So this merger would have given Prosus of firm entry into the overall payments ecosystem. And they could have actually expanded their whole business by entering new segments, like where PayU is looking at now, like lending, which every FinTech company is both PayU as well as Billdesk, they were planning the whole business, their future expansion or strategies according to how they would build the business forward. If they were to work as a joint company, single company, and BillDesk founders were actually looking to exit the company, they all wanted exit. So this everything was falling in place. And this was an agreement that signed and, suddenly, you know, this came out of nowhere.

Anirban Chowdhury 9:00
out of nowhere So in its statement announcing the cancellation of the deal, Prosus, head of investor relations, Owen Ryan, said that the closure of the transactions was subject to the fulfillment of some conditions precedent. The first of them was, of course, an approval from the Competition Commission of India, the country's competition watchdog that came on September 5, nine months after the application had been filed. In the statement, Ryan said that the other conditions were not met before the deadline of September 30. And so the agreement was automatically nixed. What were these are the conditions.

Mugdha Variyar 9:41
Essentially, the thing is there were several steps still left for the closure of the de given that the CCI approval just came in on Fifth September. And the long stop date that is 30th of September was for the closure of the deal, which includes transfer of shares the complete takeover off Bill desk by PayU. And from what I've heard from the people I've spoken to is that they could not even go ahead with, say a step three or step four without getting the step one, which is a CCI approval. And that really has been an issue for process given the the short timeline till the deadline. What also was kind of a hurdle for BillDesk, unfortunately, in this matter was that in July this year, the RBI put out a mandate that non banks that are authorized to operate any payment system need a prior approval of RBI in any deal involving acquisition or change of control. That meant that BillDesk had to get these additional approvals. And, you know, there was limited time between the CCI approval that came in September 5 and the September 30, long stop date. And from what we understand, in fact, the shareholders of builders had broached the topic of extending the deadline, but they could not come to any kind of an agreement with Prosus.

Anand J 11:03
The thing is, if process really wanted this deal to happen, there was nothing that was stopping them from going ahead with the agreement

Mugdha Variyar 11:11
or even extending the date, you know, mutually

Anand J 11:13
Yeah, even extending the

Anand J 11:15
deadline. Yes, correct. So they could have done that they weren't interested in going ahead with the deal. That's the reason why this is not going through. It's a kind of buyer's remorse kind of thing.

Anirban Chowdhury 11:27
But why the buyer's remorse? Well, according to some Prosus thought it was overpaying. Why? Because between 2021 when it had offered $4.7 billion for Bill desk, and now things have changed, inflation has struck economies, demand has been hit real bad, and government and central banks are unsure about how or how much their economies will grow. That has naturally impacted stock markets, America's biggest tech companies have lost hundreds of billions of dollars in the last few months. In fact, Pay Pal on which PayU models itself has been among the worst hit, dropping 60% from its yearly highs as of June. In Prosus homebase. Dutch payments powerhouse Adyen stock price has halved in the last one year. Naturally, investors across the world have been hit too Softbank and Tiger global, the two biggest financial backers of tech companies have seen their asset valuations really plummet process itself has lost more than half of its market cap since early last year.

Mugdha Variyar 12:35
So definitely, I think it is a change of sentiment for Prosus because when they announced the acquisition of Bill desk last year, it was peak bull market and valuations were sky high and 4.7 billion didn't really look that big last year. And this year, that number definitely seems very big, given what we're seeing in the markets globally. And that definitely was the main driver is what we understand the Prosus, I think wanted a lower valuation, and they hadn't come to any kind of an agreement. And that seemed to be the reason for Prosus to look at working out of the deal.

Anand J 13:14
Sheet. If you simply go by what Prosus was offering Billdesk, it is not actually a high price. If you compare it with what PayU Pine labs, last valuation was or, pay you slab valuation multiples, or just pay razorpay. Billdesk's was actually at a much lower valuation. So it looks from that it was a good deal for Prosus back then. It's just that, you know, the recession, fears and everything. Maybe they wanted a bigger war chest to give to companies that are much more likely to use the same money to better use maybe Swiggy or Byju. This probably didn't make sense to them.

Anirban Chowdhury 13:56
Okay, but no, that does not seem to be the only reason. Industry insiders have said that there was a tremendous amount of lobbying and corporate shadowboxing by rival firms against the deal. In fact, the CCI approval took really long to come. CCI typically takes around seven months to approve or reject an application. If it doesn't decide by then the deal is said to be automatically cleared. According to a report by cap table, the CCI or when it got the application from PayU sent detailed questionnaires to other companies in this space, such as razorpay, cash free and Paytm. asking them how the dominance of PayU plus Bill desk would impact others in this space. Some of these companies were against the deal. In January a month after the application the CCI asked PayU to apply again. In April, it applied again. The CCI approval came in September. I asked Anand if Prosus would have anticipated more regulatory hurdels and aggressive lobbying? Could that have something to do with the withdrawal?

Anand J 15:04
Okay, so that's

Anand J 15:06
a bit tricky.

Anand J 15:07
I mean, we might be speculating a bit here. Some of the comments that CCI got was from its competitors, which said, this would create a much bigger competition or a much bigger rival and all that. But ultimately, what CCI looks at is whether this deal would affect the pricing for customers, the end customers, whether it's large enterprises, or E commerce companies who are integrating payment gateways. For them. This didn't create any tendency, monopolistic or oligopolistic tendencies. Because this is a highly competitive market. There are multiple players in the space, there are multiple new entrants still happening, and you can they all the companies work on wayforth and margins. So that's one aspect that CCI looks at. I mean, CCI had questions and all the competitors actually didn't want this to happen. Some of its competition, not all, but some of its competitors didn't want to happen, because they feared a bigger rival with a much bigger and fatter paycheck, that probably made things worse for Billdesk, because that gave process a reason to walk away. And that gives process a reason to say that we didn't terminate the deal, because of our lack of interest or our valuation, you know, second thoughts on valuation and all that. But because the CCI deal took it much longer than it should have this was unprecedented situation. And that's how, or why we were forced to terminate the deal.

Anirban Chowdhury 16:39
So what you're saying is there was tremendous amounts of corporate shadowboxing and lobbying that went on behind the scenes. And while it may not have influenced CCI, it definitely gave a reason or an excuse, however, you want to look at it to Prosus to call of the deal that's what you're saying?

Anand J 16:58
Correct? Correct. Yes.

Anirban Chowdhury 17:00
Now, Billdesk counts the Indian government has as a big client, right. And SBI is one of its biggest clients. It was one of its initial investors, also, if I'm not mistaken, and so are other major banks like HDFC. Did the deal raise concerns about data security? You think?

Anand J 17:17
I wouldn't think that would be an issue here. Considering that arghya is very clear that all the payment data that originates in India has to reside in India anyway, PayU for what it is worth it's fully Indian company. So their servers should be in India and will be in India. So that's not an issue that came into picture is what I think.

Anirban Chowdhury 17:38
Right? Do you think with all that's happening, this will taper down its enthusiasm towards India and investments in this market?

Anand J 17:49
I wouldn't think that would be an issue at all here. The idea behind doing this through PayU was that they will get an operator who is keen on carrying forward the Billdesk business forward, because PayU has been in the same payment space. And process has a larger shareholding there. So it's not completely new territory for Prosus. It's just that this particular deal probably made them think again, because their investments in India till date is 9 billion, and they are investing half of that in just one single space and one single company. So that's not necessarily how an investment firm operates. That would also might have been in the picture. And you know, like we discussed just before, they probably want to put the same amount of money to better use, maybe invest in PayU to compete better with Billdesk, rather than buying out Billdesk all together.

Anirban Chowdhury 18:44
Alright, alright, move the, you know, coming back to the first question, and let's bring this conversation to a close here. What legal standing does Billdesk actually have? I mean, obviously, the idea is to either penalize Prosus and PayU or make them go ahead with the deal. But how far would that be possible? Number one, and number two, do you think this battle will play out pretty significantly in the months to come?

Mugdha Variyar 19:11
Right? You know, when I spoke to people at Billdesk, they themselves were in discussions with lawyers to understand the best way to go about it. But what constantly repeated was that this walk away has happened in bad faith. And apparently that is good reason enough to challenge Prosus for not going ahead with the deal. But definitely given that Billdesk shareholders founders are looking at legal action and given the size of the deal and given the parties involved. This is going to be you know, one of the big legal fights in Indian corporate world.

Anirban Chowdhury 19:50
So, a massive tech m&a deal gets scanned. The reason may be a mix of buyer's remorse, and slash are lobbying by its rival And now a corporate legal battle probably lies ahead. I spoke to Navin Surya, a digital payments veteran, founder of Itz Cash and chairman emeritus of the payments Council of India, to give me the last word on the implications of this, will the PayU billdesk fiasco have a negative impact on investments in this space?

Navin Surya 20:20
Absolutely. No, I don't think so. Because while the deal got announced, it did put India on a global map in terms of the size of the deal, but it didn't necessarily influence the valuations or number of deals. And even if you see the global trends in 21, when the deal was announced, that was a landmark year across the globe for FinTech, especially m&a deals, I think over 1300 or 1400 deals had happened in that year lone, some probably valuing close to about 348 billion plus in this that one year. And that's a global data. And I think that pace is anyway changed this year. I think you're talking about 5 billion in the first half, probably you're talking about some 21 deals so far. So I would say yes, it did had a lot of eyeballs, a lot of attention to India. But in terms of valuation, I don't think it has any specific changes purely on amount of this deal having some issues.

Navin Surya 21:15
And so valuations of Indian companies will not fall as steeply as they have in the US, said, Navin.

Navin Surya 21:17
So I don't think valuation is really the matter. I think that's limited to the listed space currently. And there are very some specific type of companies whose seen. And again, that has been seen implications lot more in US market, of course, in India, also to some extent, but there's one big difference Anirban in Indian market and a US market Indian market, the market opportunity continuously has remained very big, the under penetration in financial services market still remain very attractive oppotunate. So if you take these two factors, I think India is in a slightly different situation, and will continue to be so in next, I think 10 to 15 years, of course, the external factors that are impacting whether it's from a, let's say, credit, side of interest rates, so this terms of war situation, whether in terms of overall liquidity, positions of the financial capital market and a compliances, on account of, let's say, additional sanctions, etc, those will play some part. But again, as I said, on a very big deals, but other than that, I think the actual environment or a market environment in terms of opportunity depends very large in the country. So you will see some delays or a process delays or let's say caution, but I don't think much will change in India in terms of valuations.

Anirban Chowdhury 21:17
Fair enough. And finally, Navin, what are the lessons from this fiasco for investors and sellers.

Navin Surya 22:46
So first of all, again, the lessons are for probably both the parties, buyers and sellers, they could be foreign or domestic, especially in strategic m&a deals. First of all, any strategic m&a deals are extremely critical in terms of information sharing and the synergies. So both the parties will need to be extra careful, obviously, this news has created more caution environment. Also, because this is a regulated space. And now I think regulatory position has become very clear in last few months that every acquisition deal or control deal will have to need a prior approval in most of the cases, including payments now, so which means that there could be certain timelines or extra timeline required to comply with let's say, even satisfaction of regulatory queries over and above, in some specific cases, even CCI kind of process. So that's a very clear lesson that the entities will have to be extra prepared to handle it. Also, entities will need to think about because they will be extended timelines and during the timelines if there is any dynamic changes, how do they make sure the deal remains sticky? And both the parties have put skin in the game before they come out of any such arrangement? And if there is any party doing it on a wrong reasons, either of them? What are the penalties for that the other side so that the other entity or not a single party with a buyer or a seller is on site?

Anirban Chowdhury 24:08
People at Bill desk spent most of last year checking out the CCI website for the important approval that would clear the biggest deal in the Indian FinTech space. The company had almost been in limbo all year. Its expansion plans on hold its management and founders brainstorming internally on how they would integrate with its new partner. But after the CCA approval came, the deal fell through. Bill desk is naturally angry. Can it legally bind Prosus to the deal or make it pay hefty damages? That's unclear for now. As far as Prosus shareholders are concerned, the withdrawal seems like a good choice to them. It shares haven't moved much since the announcement. What led to this choice will perhaps be revealed in the coming months, especially if there's a legal fight It will either mean that overvalued Indian tech stocks will come closer to the ground or the deals in the Indian startup space won't be so easily done from here on. Either way. As Navin said, there are enough lessons in this story for both buyers and sellers in this game of bills and payments. 

You were listening to this episode on the morning brief. This episode was produced by Sumit Pande sound designer Rajas Naik, executive producers Anupriya Bahadur and Arijit Barman. Do share this episode if you liked it. The morning brief drops every Tuesday, Thursday and Friday. It's now streaming on all your preferred audio platforms, Amazon Music gaana.com, Spotify, Apple and Google podcasts, and of course, our very own ET play. Keep listening. This is your host Anirban Chawdhury. Wishing you a very good day and rest of the week. All clips used in this episode belong to their respective owners. Credits are mentioned in the description.

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