Souq Fits With Amazon's International Ambitions

Though Amazon  (AMZN)  has grown to become a retail colossus largely on the back of giant internal investments, acquisitions have played an important and underappreciated role.

Generally, the purchases have involved firms that have carved out leading positions in growing niches -- whether in terms of products, geography or sales model -- and for which Amazon would have to expend a lot of time and money to replicate what the acquired firm has accomplished.

An acquisition of Middle Eastern online retailer/marketplace Souq.com would fit with this objective. And the timing of the deal would mesh well with reported plans for a major expansion of Prime Video's global footprint.

Sources tell Bloomberg Amazon is "considering a bid" to buy Souq, an 11-year-old company occasionally referred to as the "Amazon of the Middle East," for about $1 billion. It adds, Souq initially wanted to sell "a stake of at least 30 percent," and had hired Goldman to find stake buyers. Existing Souq investors such as Tiger Global Management, which invested in Souq earlier this year through a funding round reportedly featuring a $1 billion valuation, are also said to be thinking about selling shares.

Given the details surrounding the situation, it's possible sources close to Souq are trying to drum up interest in the company's share-sale efforts by giving the impression Amazon is ready to swoop in. And intensifying competition may have management and investors feeling this is a good time to partly or fully cash out: It was only a couple weeks ago that a $1 billion Middle Eastern e-commerce venture backed by Saudi Arabia's sovereign wealth fund was announced.

It's also worth remembering that two years ago, Amazon was rumored to be in talks to buy Indian online retailer Jabong for $1.2 billion. No deal occurred; instead, Amazon has committed to investing over $5 billion in India on its own, and Jabong was recently sold to rival Flipkart for a mere $70 million.

At the same time, a Souq purchase certainly wouldn't be the first costly acquisition Amazon has made of a fellow online retailer. In 2009, the company spent $1.2 billion to buy online shoe/apparel vendor Zappos, and a year later, it coughed up over $500 million to buy Quidsi, owner of home products sites such as Diapers.com, Soap.com and Wag.com. Both Zappos and Quidsi are still run independently, and all signs suggest each business is still performing very well.

Buying Souq, which (like Amazon) both acts as a marketplace for third-party sellers and directly sells goods to consumers, would give Amazon a leading position in a Middle Eastern and North African (MENA) e-commerce market that still has pretty low penetration rates. Estimates on the market's future growth vary, but the numbers tend to be substantial; local online payments firm Payfort estimated last year Middle Eastern online retail sales would total $13.4 billion in 2020, up from $7 billion in 2014.

Souq, for its part, claims to offer more than 1.5 million products to customers in Egypt, Saudi Arabia and the United Arab Emirates. One could see Amazon leveraging its resources and logistics/fulfillment expertise to help Souq expand to other Arabic-speaking countries.

Meanwhile, with The Wall Street Journal having just reported Amazon is set to make Prime Video available in roughly 200 countries and territories, the potential exists to make video-bundled versions of Amazon Prime available in much of the MENA region. Prime launched in India in July, and a Chinese version focused on selling foreign goods to local consumers launched in October. The Chinese version of Prime lacks a video service; the Indian version is expected to get one soon.

Unlike China, where Alibaba  (BABA) and JD.com's (JD)  scale and resources make it tough for Amazon to be more than a niche player, the Middle Eastern e-commerce market is still young enough for Amazon to become a top player, and to do so without breaking the bank. Accomplishing this might not require buying a company like Souq, but it would definitely make things easier.

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