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Daisy Group’s cloud unit valued at £1bn after Inflexion agrees deal

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Private equity company Inflexion has agreed to acquire a minority stake in the cloud computing unit of Daisy Group in a deal that values the business at more than £1bn.

The investment will pre-empt a potential float of Digital Wholesale Solutions, or DWS, in the next three years to tap into investor demand for information technology-related companies, following the success of Gamma Telecom and Softcat as listed companies.

An agreement to sell a minority stake in DWS was clinched over the Christmas period, according to two people with direct knowledge of the talks. The deal is likely to complete over the next month and still requires regulatory approval.

The stake sale follows a failed attempt in 2018 to sell Daisy Group, which is best known as a competitor to BT in the corporate telecoms market. Matt Riley, the founder who led the company when it was a listed business, returned as chief executive after the process faltered. He bought out minority shareholders after Ares, the US asset manager, agreed to provide £1bn in debt financing in 2019.

Mr Riley will remain as chairman of the separated DWS, which accounts for about a third of the broader Daisy Group’s revenues. Daisy was advised by Oakley Advisory on the deal.

Inflexion, which owns cloud hosting business UKFast and bought Goals Soccer Centres last year, has made the DWS investment through its Partnership Capital Fund, which takes minority stakes in high-growth businesses.

Daisy and Inflexion declined to comment on the investment.

Daisy Group was one of the most active UK telecoms companies when it was a listed company, snapping up almost 50 of its rivals and stripping out costs by moving service work to Nelson in Lancashire, Mr Riley’s home town. This helped it become one of the largest telecoms suppliers to small and medium-sized businesses, rivalling BT and Virgin Media. It has since expanded into technology services via the acquisition of rivals including Phoenix IT.

The DWS split will mean the business has slimmed down to its enterprise telecoms business Daisy and engineering business Allvotec.



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Asian bourses look to join Spacs craze despite governance concerns

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The Indonesia Stock Exchange has become the third Asian bourse, after Hong Kong and Singapore, to explore allowing special purpose acquisition vehicles, prompting concerns about investor protection as Wall Street’s mania for the vehicles extends to the region.

Investors have poured almost $3bn into Spacs focused on acquiring Asian companies this year, nearly doubling the amount committed during all of 2020, according to Dealogic.

Last year, there was only one Spac deal involving a company based in an Asian country, and just five successful listings of Asian start-ups via Spacs in the past five years.

The rush for targets from a widening pool of investor cash has prompted concerns among some sponsors about inflated valuations for young companies, where management teams may be unprepared for the regulatory requirements of a US listing.

It has also come despite efforts by Asian bourses to tighten restrictions to block backdoor listings and other deals that avoid the strict independent due diligence required of a traditional IPO.

“Everyone is chasing the same deals,” said Frank Troise, chief executive of SoHo Advisors, a boutique US investment bank. “In some cases, there are 12 to 15 sponsors chasing one target.”

Spacs raise money by listing on a stock exchange and then using the proceeds to take promising private businesses public through reverse takeovers. Shareholders do not know which businesses the vehicles will target and invest based on the records of those sponsoring the Spacs.

Investors poured $100bn into Spacs globally last year. The trend has continued into 2021, with 188 vehicles raising $58bn in the US alone.

Some of Asia’s best-known investors and richest tycoons have waded into the asset class, including Ken Hitchner, who ran Goldman Sachs in Asia Pacific, and Fred Hu, a China private equity veteran.

Richard Li, son of Hong Kong tycoon Li Ka-shing and one of the city’s most prominent businessmen, and Peter Thiel, the US tech investor, have also backed large acquisition vehicles aimed at opportunities in the region.

Many Spacs are targeting south-east Asian tech companies, especially after the meteoric rise of New York-listed Sea, a Singapore-headquartered gaming and ecommerce company that was one of the world’s best-performing stocks last year.

GM020307_21X Global Spac acquisitions

Yet most of south-east Asia’s nascent start-ups are valued at under $3bn, the threshold bankers and investors said was needed to take a company public in the US.

The level of interest is there for south-east Asia but “the amount of actual suitable targets is not”, said Ee Ling Lim, a regional director for venture capital firm 500 Startups.

Only a few of the Asia-focused Spacs launched this year had local sponsors or ones with a history of investing in the region.

These included Provident Acquisition, a $200m Spac focused on Asia launched by south-east Asian fund Provident Growth. The firm has backed Gojek, Indonesia’s biggest start-up, and Traveloka, another one of the country’s four unicorns, or private companies valued at over $1bn.

“There are quite a few unicorns already in south-east Asia and more next generation companies coming through, some of which are ready for public markets,” said Michael Aw, chief executive of Provident Acquisition.

Beyond south-east Asia, some Spacs are targeting larger markets including India, where companies are regarded as more mature. Last week, ReNew Power, one of India’s largest renewable energy groups, unveiled plans to go public in New York through an $8bn deal with a Spac.

The New York Stock Exchange and Nasdaq are the prime venues for such listings. But Asian markets are increasingly looking to grab a share.

Johnson Chui, head of Asia capital markets at Credit Suisse, warned that implementing a Spac issuance framework in Singapore, Hong Kong or Indonesia would require “a lot of education” for stakeholders.

Column chart of Total deal value of Asia-focused Spacs ($bn) showing Global boom in Spacs swings to Asia

Hong Kong has captured tech listings in the region but Singapore and regional bourses including Indonesia have grappled with how to convince homegrown unicorns to list locally.

Allowing Spacs would provide companies with “another alternative for fundraising”, said Pandu Sjahrir, Indonesia Stock Exchange commissioner, adding that companies could then tap local bond and bank lending markets with no currency mismatch.

Indonesia has provided fiscal incentives for companies to pursue domestic listings, with capital gains tax falling to 0.1 per cent from 22 per cent for those that list locally.

However, Asia’s limited history of companies successfully going public through a Spac could weigh on the region’s prospects.

New Frontier Group, an investment firm run by Anthony Leung, Hong Kong’s former financial secretary, merged Chinese private hospital United Family Healthcare with its Spac on the New York Stock Exchange in 2019.

But the company has consistently traded below its $10 a share initial offering price and is set to be taken private by a consortium led by Leung. The proposed buyout would value New Frontier Health at $12 a share.

Sponsors have also come under increasing scrutiny for their lucrative compensation, typically receiving a 20 per cent stake in the company for a nominal sum of $25,000.

“Regulators in Asia spent a lot of time cutting backdoor listings because all sorts of folks loved them for making a quick buck,” said one senior investment banker. “Where it falls apart is if we have unscrupulous sponsors or companies trying to get into this market.”



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London celebrates but for Deliveroo IPO to succeed, it needs to deliver

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The City’s future is arriving by bicycle. It may not match what was ordered.

Deliveroo on Thursday made formal its promise to float in London. The Hill review of listings rules prompted the courier dispatch service to add a preamble to its intention to float statement, expected early next week. Lord Jonathan Hill gave Deliveroo’s politically savvy spin team a quote for the media blitz, as did Oliver Dowden MP and London Stock Exchange chief executive David Schwimmer. Looser rules, they all agreed, make London a more attractive destination for technology champions.

There’s a reason this looks like lobbying. Deliveroo founder Will Shu intends to retain control of the group, so his float will involve a two-tier shareholder structure. Under current rules, that means a standard listing and FTSE index exclusion. Investors will be offered the insurance policy of a three-year sunset clause, meaning premium status can still be secured even if the relaxed attitude to dual-class ownership never becomes law. The clause is a deadline Shu will want to neutralise.

The Deliveroo camp has been vague about potential valuations. Optimism runs as high as $10bn, with the floor provided by a fundraising agreed in January that put the headline value at just over $7bn. The success of online retailer THG — up 40 per cent since its standard-grade float in September — provides a useful benchmark for founder-controlled businesses.

But THG is a different proposition. Whereas its profitability is proven, Deliveroo is a cash-burning machine. Its accounts show losses of £133m in 2016, £199m in 2017, £231m in 2018 and £318m in 2019. Lockdowns perked up performance — the January fundraising preceded six months of operating profitability, according to Shu — but only after an early wobble that convinced the Competition and Markets Authority in April last year to show charity to what it called a “failing firm”.

Profitability rarely matters much in food delivery. Germany’s Delivery Hero and DoorDash in the US both have stratospheric valuations and conceptual business plans where any route to profitability requires competitors to fail. What helps them is that ownership across the sector is a web of interconnections. All the main owners appear to apply the same strategy of securing market leadership or exiting.

Deliveroo is different. It was once considered a weak competitor, until Covid-19 came to lift all boats. It was once an acquisition target for any operator keen on tidying up an overly competitive UK market, until Amazon last year bought a 16 per cent blocking stake that can only be increased with CMA approval.

Now it’s a British tech champion, using pandemic-inflated metrics to give existing backers an exit opportunity and raise yet more cash to burn in search of a functional business model. Those rushing to celebrate its choice of IPO venue as a victory for regulatory liberalism might soon wish they had waited to see exactly what’s inside the box.

B&M’s no bargain

Investors have been filling baskets with B&M shares almost as fast as shoppers at the discount retailer have been stocking up on home essentials, writes Andrew Whiffin.

Stockpiling and lockdown demand helped propel the stock into the FTSE 100 index last year, but Thursday marked a crucial hurdle. In a fifth and likely final unscheduled trading update in the year to March, B&M said earnings before interest, taxes, depreciation and amortisation would be £50m higher than it previously expected. The positive news was overshadowed by caution that the group’s final month would be up against tough comparisons from last year’s March spike in panic buying. 

The short period of uncertainty will help determine whether a good year for the retailer was a blip or part of a longer lasting trend. B&M estimated new customers in June accounted for almost a quarter of shoppers. A strong March would offer an indication that these B&M converts can become regulars. Shares trading at 17 times two-year forward earnings — the top of their recent valuation range — need signs of permanent market share gains to continue their upward journey.

The benefits of 2020 have flowed directly to shareholders, the largest being the holding company of the founding Arora brothers, with an 11 per cent stake. Special dividends of £600m in the past year push total returns to almost 60 per cent since the start of 2020, eclipsing the flat returns of the dominant UK grocers. 

Bulk buying for lockdowns is just one way the pandemic helped the group. Like-for-like sales growth of almost a quarter in the six months to September was supported by a higher mix of merchandise trade. Housebound consumers bought more DIY and gardening equipment helping to boost profit margins.

Ebitda in the first half of the year doubled while margins gained almost 5 percentage points, hitting 13.3 per cent. This is expected to ease in the coming year as one-off sales drop out of the numbers. Analysts’ consensus estimates for 2021/22 are at present about a tenth below those for the current year. 

B&M has been one of the biggest beneficiaries of harsh UK lockdowns that have left consumers bored, homebound and cash rich. As vaccine rollouts hasten a return to normal, that trade remains exposed.

Deliveroo: bryce.elder@ft.com
B&M: andrew.whiffin@ft.com

City Bulletin

Sign up to the City Bulletin newsletter for the latest company news. Every morning our UK equities reporter Bryce Elder covers the biggest business stories and delivers them straight to your inbox by 8am UK time.



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Deliveroo picks London for IPO after listings review

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Deliveroo has chosen London for its highly anticipated initial public offering after Rishi Sunak, the UK chancellor, endorsed an overhaul of listing rules to allow founders to retain more control after going public. 

The multibillion-pound IPO is expected to be among London’s largest this year, handing the City a much-needed win over New York and Amsterdam at a time of feverish activity in new tech listings. 

“Deliveroo is proud to be a British company, and the selection of London as its home for any future listing reflects Deliveroo’s continued commitment to the UK,” said Claudia Arney, Deliveroo’s chair. 

Deliveroo’s decision follows the publication on Wednesday of a review by Lord Jonathan Hill, former EU financial services commissioner, which recommended a wide range of reforms to loosen listing rules in the UK. 

Among Hill’s recommendations were proposals to allow dual-class share structures, which allow founders to hold on to extra voting rights after an IPO, to be used by companies trading on the London Stock Exchange’s “premium” segment. The dual-class arrangement is popular in Silicon Valley, where it is used by companies including Facebook and Google parent Alphabet. 

The move, which Sunak endorsed during Wednesday’s Budget, was designed to attract fast-growing tech companies such as Deliveroo, though some London fund managers fear the change puts shareholder protection at risk.

Deliveroo said in a statement on Thursday morning that its dual-class structure would be “closely in line” with the Hill review’s recommendations and be limited to three years. However, the changes are unlikely to come into force before it has completed its IPO, with initial paperwork expected to be filed as soon as next week.

Companies with dual-class structures can already trade on the LSE’s standard listing. Once the new rules are in place, Deliveroo would be able to move up to a premium listing. A person close to the company said that the Hill review was also likely to attract more tech companies to London, making it more attractive as a listing venue overall.

“Alongside the dual-class share structure, Deliveroo intends to have a strong commitment to corporate governance standards including a majority independent board of directors as well as upholding diversity standards,” the company said. 

Will Shu, Deliveroo’s co-founder and chief executive, said he was “proud and excited” to list in London, where the company first began making restaurant deliveries in 2013. 

Sunak hailed the decision as “fantastic”. 

“Deliveroo has created thousands of jobs and is a true British tech success story,” he said in a statement. “It is great news that the next stage of their growth will be on the public markets in the UK.”

Arney added: “London is not just where Deliveroo was born, it is one of the leading capital markets in the world, with an incredible technology ecosystem, sophisticated investment community and a skilled talent pool. The time-limited dual-class structure would provide Will and his team with the certainty needed to execute against their ambitious growth plan to become the definitive online food company.”



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