Amazon (AMZN) - Get Report agreed to buy 100% of the United Arab Emirates e-commerce site Souq for a sum between $650 million and $750 million in a deal that Goldman Sachs (GS) - Get Report helped put together, two people familiar with the matter told the Financial Times. The deal was first reported by Reuters on Wednesday, although no pricing details were divulged.
This is a relatively small deal for Amazon, which did $136 billion in sales in 2016, representing a 27% jump from $107 billion in 2015. Because Amazon prefers to build rather than buy, its largest deal to date was a $970 million one to acquire live streaming video platform Twitch in 2014.
Souq is named for the Arabic word for marketplace and is the largest e-commerce site in the Arab world. The company offers 8.4 million products on its site, including electronics, books and groceries, according to The National. By comparison, Amazon offers an estimated 40 million products. While Souq started as an auction site in 2005, it transitioned to a retailer and third party vendor in 2011, with 60% of its business now coming through third party vendors.
In February 2016, the e-commerce company raised $275 million in a funding round that valued the entire company at $1 billion. Investors who participated in the round included Tiger Global Management, Naspers, Standard Chartered Private Equity, International Finance Corporation and Baillie Gifford.
The steep valuation reportedly led to a breakdown in a potential deal in January. But in early March, the talks were back on with a price tag of as much as $650 million, according to Bloomberg. "Have you ever heard of a company thinking they are fairly priced?" Benchmark analyst Daniel Kurnos said to TheStreet.
Without knowing the financials behind Souq, it's hard to say if this is a good deal or not for Amazon, but even at a $1 billion price tag, it's still relatively small for Amazon, Kurnos noted (Amazon's current market cap stands at more than $404 billion) The important thing is that the Middle East is one of the fastest growing markets and it's under penetrated, he said.
Argus Research director of research James Kelleher agreed with Kurnos, noting that the Middle East was a good market to go into because there is no one hugely dominant market player there already. "Amazon recognizes that it can't sit back and wait for Alibaba (BABA) - Get Report to come in and do what they've done in China," he said.
Although Souq.com boasts 78% of all e-commerce traffic in the Middle East and North Africa (MENA) region, it only accounts for 1% to 2% of retail business for the area, according to The National, making for a huge opportunity for a big player to come in and scoop up market share.
The deal will give Amazon a foothold in the region, but it runs counter to Amazon's usual tendency to build rather than buy, Kelleher pointed out. The company goes about its strategy in its own way, not worrying about what Wall Street wants, he said. So the fact that Amazon chose to buy rather than build tells investors a lot. "By buying rather than building, it tells me that Amazon feels Souq has value," he explained.
The only other competitor on the horizon for the region is noon.com, a $1 billion e-commerce platform backed by Emirate billionaire Mohamed Alabbar and the Saudi Public Investment Fund. The site was expected to launch in January with 20 million products and a 3.5 million square foot fulfillment center in Dubai, but its home page still says that it's "coming soon."
While Souq's financials largely remain a mystery, it did sell 1.2 million products over the White" Friday" weekend last November, double the number sold during the same weekend in 2015. White Friday is the region's version of Black Friday, renamed to take into account certain local opinions that black can be a bad omen.
Amazon and Souq did not immediately return TheStreet's request for a comment.