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Lex Midweek Letter: rite stuff from Airbnb and DoorDash

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Dear readers,

When a US tech unicorn’s fancy turns to thoughts of public markets it must make an S1 filing. Two of the biggest start-ups in the US, Airbnb and DoorDash, have undergone that rite of passage in the past week.

For outsiders such as journalists and investors, this is cause for celebration. An S1 is a form that companies file with the US Securities and Exchange Commission before they list. The idea is to give investors and the SEC a clear look at the pre-IPO business. All the questions that a start-up founder has previously evaded need to be answered publicly. Mad growth metrics, grandiose claims about changing the world and knotty problems are published for all to see. 

In its simplest form, an S1 will give a summary of the business, how much it wants to raise (although this can change at a later date), what the money will be spent on and how the business is doing. But each one is special in its own way.

Sometimes an S1 can be a full-blown horror show. Eccentric office rental company WeWork showed that the company was in an even more alarming state than its critics had realised when it published its S1 last year. Full-year net losses of $1.9bn had built up alongside $47bn of lease obligations and plans to elevate the world’s consciousness. That was before the revelation of an outlandish $5.9m payment to founder Adam Neumann for the word “We”.

The timing of S1s from Airbnb and DoorDash makes sense. Room rental company Airbnb’s initial public offering comes quick on the heels of news of two effective vaccines against Covid-19. Holidays and business trips could be back on next year. Food delivery app DoorDash’s listing follows months of lockdown in which bored households have ordered more takeaways than ever before.

Airbnb, which has raised more than $6bn as a private company, is the most anticipated tech IPO this year. Its S1 is notable for saying the word “community” a lot. More than 150 times, in fact. The pattern of net losses it reveals is peculiar too — from $135m in 2015, $147m in 2016, $70m in 2017, $17m in 2018 and then back up to $674m in 2019. Airbnb says this was driven by “significant investments” in upgrading its technology. But investors should keep an eye out to make sure this was a one-off. 

The document also shows just how devastating the effects of the pandemic have been on the travel industry. Total revenue fell almost a third in the first nine months of 2020 compared with the same period last year. Net losses doubled to almost $700m. One interesting point: Airbnb says it was able to keep up bookings even as it reduced advertising spend, with 91 per cent of traffic arriving via direct or unpaid channels. This bodes well for keeping a lid on future costs.

DoorDash’s S1 is also full of feel-good words about communities. Chief executive Tony Xu writes that “fighting for the underdog is part of who I am and what we stand for as a company . . . DoorDash has always been about helping local businesses succeed”. Others might disagree, including restaurants unhappy about the cut DoorDash takes and freelance drivers who would prefer to be treated as employees.

The document also shows that the effects of the pandemic were outsize, although for DoorDash the change was positive. In the first nine months of 2020, customers spent $16bn. This provided DoorDash with revenue of $1.9bn — up more than 220 per cent on the previous year. 

But, as with any S1, the list of risks are where the real fun lies. Airbnb admits it may never be profitable and continues to fight with regulators. Over at DoorDash, the company has “identified a material weakness in our internal control over financial reporting”. In a sector not known for its humility, it is always nice to get a dose of cold, hard reality.

Enjoy the rest of your week (and any S1s you happen to read).

Elaine Moore
Deputy head of Lex 



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Darktrace/UK IPOs: shoes for every occasion

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Unpredictable nature of listing process means ‘greenshoes’ will remain required footwear



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Global IPOs begin 2021 at breakneck pace

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Listings on stock markets around the world are running at a record pace, with both deal numbers and values at their highest levels for the start of any year in at least two decades.

This year, 875 initial public offerings each raising at least $1m have been clinched globally, according to data from Dealogic that cover the last 26 years. That figure far outstrips the previous record set in the final months of the dotcom boom in 2000, when 592 companies raised $1m or more in floats over the same time period.

The deluge of listings has lifted IPO proceeds to a record-setting $230bn this year, well above the previous peak of $80bn set in 2000.

The boom stems largely from a spree of flotations of shell companies known as special purpose acquisition companies, or Spacs, which have accounted for almost half of the fundraising haul through IPOs in 2021. Spacs have no underlying business and instead raise capital to pursue a merger with a privately held business.

But the rise in IPOs also reflects enduring demand for global listings in a year when markets have rallied to new highs, with marquee names such as South Korean ecommerce company Coupang and US dating app Bumble making public debuts.

Globally, proceeds from IPOs in 2021 have already surpassed the full-year totals for 21 of the past 26 years.

Column chart of Number of IPOs, by type showing The number of companies going public has ballooned

“The numbers are encouraging because they’re evidence that people have renewed confidence that public markets are a good way to exit their business,” said Carlton Nelson, co-head of corporate broking at Investec. “It shows that they don’t have to tap into private capital despite it being easier and more efficient than it has been for a long time.”

The listings have been heavily tilted to the US, where Spacs had flourished before running into trouble in recent weeks. Roughly two-thirds of the $230bn of capital raised this year has been through listings in the country. China and Hong Kong have trailed in distant second and third places as the preferred choice for new listings, accounting for 8 per cent and 5 per cent of IPO proceeds, respectively.

Column chart of Global initial public offering proceeds ($bn) showing Companies and Spacs have raised $230bn through IPOs in 2021

Among the big debuts already this year have been SoftBank-backed Coupang, which along with selling shareholders raised $4.6bn, and TikTok’s video-sharing rival Kuaishou, which raised $6.2bn in its Hong Kong listing. Food delivery app Deliveroo also made headlines with its London IPO, which raised $2bn for the company and early backers but was ultimately panned by new investors.

Other large listings are already in the queue, including entertainment group Endeavor, Jessica Alba’s consumer goods business Honest Co and stock trading app Robinhood.

The data do not include direct listings, where companies decline to raise capital when they go public, meaning cryptocurrency exchange Coinbase’s blockbuster debut on the Nasdaq earlier this month is not counted in the figures.

Chris Nicholls, who leads Deloitte’s UK IPO and equity advisory team, said he believed the rest of the year looked promising for a spate of new listings.

“As you see economies emerging from lockdown, there should be a period of strong [economic] growth, which bodes well for this wave continuing for a while longer,” he added.

A key question is how much air will come out of the Spac phenomenon, which ballooned in popularity last year but has “slowed meaningfully” in recent weeks, according to strategists with Goldman Sachs.

Bar chart of Cash raised through initial public offerings, by company nationality ($bn) showing Roughly two-thirds of IPO proceeds have been raised in the US

Staff of the Securities and Exchange Commission earlier this month promised closer scrutiny of the revenue and profit projections from companies that use the vehicles to go public, and the number of new Spac listings has plummeted.

Still, the global economic reopening after the coronavirus pandemic is likely to prompt companies to pursue flotations, Investec’s Nelson said.

“IPOs have a long gestation period, it’s not just when the starting gun has been fired,” he added. “It’s really encouraging to see companies of all shapes and sizes starting those conversations now, even if it’s for a few years’ time in the future.”



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Pepco and Poundland chains target multibillion valuation in IPO

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South African conglomerate Steinhoff is set to raise up to 4.6bn zlotys ($1bn) when it lists its Pepco chain of discount retailers in Warsaw this month in the latest in a series of asset sales.

Pepco, which operates about 3,200 stores in countries including Poland, Romania and Hungary, as well as Poundland in the UK, said on Wednesday that shares in the offering would be priced between 38 zlotys and 46 zlotys.

In total, Steinhoff and members of Pepco’s management team will sell 102.7m shares or 17.9 per cent of Pepco to the public, valuing the company at between 21.9bn zlotys and 26.5bn zlotys. The final price will be set on May 14, and trading will begin on May 26.

A portion of shares will also be placed directly with some of Steinhoff’s lenders, following an earlier agreement between the conglomerate and its creditors.

Andy Bond, the former Asda chief executive who now runs Pepco, intends to sell more than 1m shares in the IPO, worth roughly €9.7m at the midpoint of the price range, though he will be subject to a lock-up period until the end of 2023 thereafter.

Bond said the company planned to open a further 8,000 stores “over the longer term”, but would also keep “a clear focus on costs and delivering additional efficiencies as we grow”.

Pepco’s listing is likely to be one of the biggest this year on the Warsaw exchange, which has seen a flurry of activity since Poland’s dominant ecommerce platform Allegro raised 9.2bn zlotys last year in the country’s largest initial public offering

Steinhoff will initially retain a stake of about 82 per cent, but the group is looking to sell assets to reduce debt after an accounting scandal in 2017. 

It has already sold Bensons for Beds, another UK retailer, to private equity group Alteri, and has an option to sell a further 15.4m shares in Pepco in the offering if investors show sufficient interest. Goldman Sachs and JPMorgan are advising on the IPO.

Pepco’s business heartland is in central Europe, but the group is planning to expand elsewhere on the continent, such as Spain, and is targeting earnings before interest, tax, depreciation and amortisation of more than €1bn within the next “five to seven years”.

In the year to the end of September, it reported sales of €3.5bn and underlying ebitda of €229m. Ebitda was almost a third lower than in the previous 12 months, as the pandemic forced stores to close across Europe.

Like many other discount retailers, Pepco does not trade online, as the small size of the purchases typically made by its customers makes the economics of ecommerce difficult.

The group said last week that sales had risen 4.4 per cent in the six months to the end of March, thanks to the opening of more than 200 new stores. However, on a like-for-like basis, sales were down 2.1 per cent.



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