Seattle, Washington-based Amazon (NSDQ:AMZN) is in talks to buy Dubai-based Souq.com, the largest e-commerce player in the Middle East, a market projected to be worth $20 billion this year. Souq.com, which was earlier believed to be pursuing a 30% stake sale, has been offered $1 billion by Amazon for a complete buyout. Why? From innovative logistics solutions to payment solutions, in a seemingly tough landscape, Souq.com has built out key infrastructure that would otherwise be difficult for new players to put in place. If it goes through, this deal could be a great catalyst for Amazon.com, on multiple fronts.Amazon's Souq.com Acquisition - A Strategic Fit
Souq.com, which is reportedly the largest e-commerce site in the Middle East, has a business model that's almost identical to that of Amazon's. Apart from serving as a marketplace for third party sellers, Souq.com also retails goods online directly. Interestingly, Souq.com also launched its online hypermarket SOUQ Superstore earlier this month, which will offer "food & grocery, health & beauty, household needs, pet care, nutrition & supplement and baby care & food.", and is complementary to Amazon's efforts in the grocery space under the name Amazon Now. Souq.com has its presence in the UAE, Saudi Arabia, Kuwait and Egypt.Souq.com Brings With It A Fast Growing Market That's Waiting To Explode
Souq.com was valued at $1 billion after it raised $275 million earlier this year, in a funding round that's regarded as "the largest ever financing of an e-commerce business in the Middle East." Being the leading e-commerce portal in a fast-growing market that has "some real wealth" and "big youth populations" as Bloomberg puts it, those valuations aren't shocking. To put things into perspective, this market is projected to be worth $20 billion by the end of this year, and in the countries that Souq.com operates, online sales are set to grow between 60% and 90%.
Those are startling numbers, given the economic slowdown that is unfolding in this region. That said, we've seen this before with China's Alibaba (NYSE:BABA), where a moderation in China's economic growth hasn't hurt e-commerce yet. Moreover, when compared to markets like the US, e-commerce penetration rates are relatively lower in the regions where Souq.com operates. These are markets that are waiting to explode, characterized by "High mobile penetration exceeding 100 per cent in some countries and a young population familiar with technology are helping to boost growth in online shopping."Souq.com Has Built Out Key Infrastructure
As of July 2015, over 50% of Souq.com's 35 million monthly visits came from mobile phones. As per latest data, that monthly visits number has swelled to 45 million. However, only 10% of transactions originate from mobile devices. You could, at least in part, put this down to the lack of adequate infrastructure to support digital payments. That said, Souq.com has laid the foundation for a workaround, which Amazon won't have to build from scratch, if it does acquire the e-commerce platform:
"Credit card usage is not common throughout the Middle East. It has therefore created a prepaid card that can be purchased in brick and mortar stores for cash and then can be redeemed online. "
And numbers suggest that the potential is huge. Even though mobile transactions form such a small piece of the pie, these transactions reportedly account for 50% of Souq.com's sales. It's possible that this ratio is partly skewed by the 80:20 rule, where the biggest spenders who contribute bulk of the sales are likely more tech savvy buyers who use mobile devices. However, there's no doubt that the digital payments infrastructure is under-developed, and offers huge room for improvement. And to leverage that opportunity, Souq.com also:
"owns its own payment gateway called Payfort, which has been a way to get merchants selling online not just on Souq but elsewhere too. In future, the company plans to take Payfort into offline payments, potentially with point-of-sale services."
We know how Paypal (NSDQ:PYPL) gained from its integration on eBay (NSDQ:EBAY), but this could be much bigger. Offering point-of-sale services in this evidently under-penetrated market, could potentially make Payfort a big beneficiary of the inevitable growth of the digital economy in these regions. Last but not the least, there's a synergy here, with Amazon also looking to make inroads in the online payments space.An Evolved Logistics Advantage In A Tough Landscape
Apart from payments, the other area where Souq.com has laid out much needed infrastructure is logistics. Quoting from the same report:
"Another huge challenge is the lack of a dependable logistics infrastructure or mail service, or in some locations, the lack of any address system. Souq.com has tackled this challenge by developing its own local delivery system, investing in logistics companies, and coordinating with local couriers."
Souq.com has essentially built out key systems that would otherwise consume a fair amount of time, effort and money for new entrants like Amazon.com. By acquiring the platform, Amazon will inherit all of this and more.Coming To The Numbers
There aren't any official numbers on Souq.com's revenue. However, estimates suggest that the platform raked in $136 million in 2014, and $270 million in 2015, with sales expected to grow by 90% this year. Whether these are GMV (Gross Merchandise Value) numbers or actual revenue (excluding payouts to third party sellers) isn't clear. Either way, Souq.com has made reasonable progress given that it started out in the retail space in 2011, just about 5 years ago. And given that Amazon knows more than just a thing or two about payments, logistics and e-commerce, the combined entity (if the deal goes through) would be well positioned to leverage the synergies.
With Souq.com sales expected to double this year, and considering the exponential growth projected in this market, Amazon's bid, which translates to less that 2X sales, doesn't look very expensive. Do note that talks are still on, and the deal could potentially still fall through. However, it's quite clear that if the deal does go through, it could be a great catalyst for Amazon.com in the Middle East. Evaluating tech stocks? Check out Amigobulls' top technology stock picks, which have beaten the NASDAQ by over 110%.