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Lure of US premium valuations proves too strong

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Two weeks ago, British cannabis medicine specialist GW Pharmaceuticals was bought by US-based Jazz Pharmaceuticals for a cool $7.2bn. Chalk one up for UK capital markets? Not so fast.

Like many pharma companies, GW was listed on the Nasdaq having abandoned London’s junior Aim market in 2016. Back then, it was valued at just £2.6bn. But it was clear the demand for its stock was across the pond, and its eventual success proved to be the UK’s loss.

It’s not hard to understand why. The Nasdaq has long been the home for listed companies with big promises and premium valuations, but little to show for it. The London Stock Exchange meanwhile, is increasingly becoming a repository for low-growth financials, miners and consumer goods companies.

For a speculative growth company, a higher share price can make a real difference. Workers are more likely to accept stock compensation in lieu of hard currency, saving cash for capital investment. While expensive equity means extra funds can be readily accessed without seriously diluting shareholders.

The rich valuations available in US markets have been too much of a temptation for Britain’s smaller companies of late. In April 2020, gambling software company GAN left Aim for a Nasdaq IPO. At the time, it had a market capitalisation of £140m. Less than a year later, US punters have put an £875m price tag on the business.

Others are following suit. The share price of life sciences company MaxCyte has risen nearly 10-fold since it announced it was seeking a dual listing in the US in early 2020, while the explosive success of biotechnology business Immunocore’s Nasdaq IPO in January will not go unnoticed by other late-stage biotech hopefuls such as the much heralded Oxford Nanopore.

Defenders of the UK markets will undoubtedly point to the success of names such as Just Eat, Ocado and Codemasters, but all of these started off as much smaller listed businesses. Would they still plump for the UK market today? It’s looking increasingly hard to make that case.

Jonathan Hill is finishing his review of the UK’s listing rules, with the final document due within weeks. Some of the ideas mooted include a smaller free-float requirement and dual-share class structures so founders can retain control.

But given the US can offer all of these, plus a steady line of punters who will pay for growth at double-digit multiples of revenue, it’s hard to see how the UK stops its budding tech names taking a trip past Ellis Island in search of financial glory.

Smith & Nephew: bumps and bruises

Pharma and biotech are booming thanks to the pandemic, but spare a thought for the medical devices industry which has been hit hard by lockdowns over the past year. Smith & Nephew, a £15bn group, is no exception, writes Andrew Whiffin.

Delays to non-emergency surgery meant underlying revenues at the joint-replacement and wound-dressing manufacturer fell 12 per cent to $4.5bn in 2020.

Margins were even weaker, falling 8 percentage points to 15 per cent on an ebita basis. The company said it expected them to be disappointing again this year. Shares in the FTSE 100 group reacted with an 8 per cent fall in early trading, leaving them a quarter below their 2019 pre-pandemic peak. Even at that price, they still look fully valued at 20 times 2023 earnings estimates.

Lockdowns are a serious issue for Smith & Nephew. They stop routine medical procedures and there are fewer personal injuries because people are out and about much less. At the same time, schools closures have reduced demand at the group’s ear, nose and throat business. Renewed lockdowns in the first months of 2021 will take a similar toll.

Divisional results highlight the problem. Revenues from knee treatments were down 16 per cent annually, though hip replacement sales fell just 0.5 per cent. Pent-up demand should help post pandemic but, given the uncertainties, it is hard to say when that will kick in.

There are some signs of strength. Smith & Nephew has not needed to cut staff or use the government’s furlough scheme during the pandemic and R&D spending actually rose by $11m. Acquisitions also add to the group’s medical bag of products in ear, nose and throat, as well as shoulder replacement treatments.

While travel, leisure and the entertainment industry are sure to be beneficiaries of resurgent demand when lockdowns end, it’s unlikely to be the same for medical devices. It might take longer for Smith & Nephew’s shares to heal than the market thinks.



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Quorn owner Monde Nissin plans record Manila debut share offer

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The Philippines’ top instant noodle producer and owner of UK meat substitute maker Quorn plans to raise as much as $1.5bn from what would be a record initial public offering in Manila.

Monde Nissin, which produces Lucky Me! instant noodles and SkyFlakes crackers, said on Thursday in an IPO prospectus that it would sell 3.6bn shares at up to 17.50 pesos each to raise a total of up to 63bn pesos ($1.3bn).

The listing could raise as much as $1.5bn if banks on the deal exercise an option to sell 540m additional shares.

At $1.3bn, the IPO would already be the largest by a Philippine company as well as a record debut share offer in Manila.

Monde Nissin said the funds raised would be used to boost production at its flagship noodle brand in the Philippines and to increase capacity at Quorn, which Mondo Nissin acquired in 2015 for £550m.

Quorn has enjoyed strong demand in recent years, bolstered by high-profile domestic hits including a “vegan-friendly” sausage roll sold at bakery chain Greggs. Quorn has also partnered with Liverpool Football Club to offer meat-free meals on match days.

But it has struggled to turn out enough of its fungus-based meat substitute to move substantially beyond its retail customer base, even as competitors such as Beyond Meat have clinched deals with chains including McDonald’s.

“They just don’t have enough supply; in the US [in particular] that’s really held them back,” said one banker on the deal, pointing to the limited rollout of a Quorn-based vegan burger known as “The Impostor” through a partnership with KFC.

The banker said Quorn was “going to attack the US much more aggressively” once it boosted capacity. Assuming sufficient supply, there was a long list of fast food clients who would “adopt Quorn because it’s competitive on the chicken side”, the banker added.

The listing, which is expected to price in April, would be the latest big offering in what bankers say is on pace to be one of the strongest years yet for IPOs in south-east Asia — one of the first regions outside China to be hit by the Covid-19 pandemic, and which is expected to be among the first to emerge from it.

ThaiBev, the drinks group, is poised to list its brewery business in Singapore in a deal expected to raise about $2bn and potentially value the unit at up to $10bn, people familiar with the matter told the Financial Times in January.

The Monde Nissin IPO is a rarity for the Philippines in that the entirety of the base offering will be new shares, rather than being sold off by existing shareholders.

Pre-IPO stakeholders include Betty Ang, the company’s president, and the family of her Indonesian husband — the son of Hidayat Darmono, who founded Indonesia’s dominant biscuit maker Khong Guan.

Both Ang and her extended family keep a notoriously low profile. One banker on the deal described Ang and her relatives as “very, very private”.

Bookrunners on the Monde Nissin IPO include UBS, Citigroup and Credit Suisse.



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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

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