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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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Oatly’s US IPO prospectus highlights risks to its Chinese backer

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Oatly, the Blackstone-backed vegan milk company which on Monday filed to float on Nasdaq, said it would consider adding a listing in Hong Kong within the next two years, citing its relationship with a Chinese state-owned conglomerate.

China Resources owns more than 60 per cent of the Swedish group through a joint venture with the Belgian family investment group Verlinvest and has helped the company to dramatically expand its presence in China in recent years.

In a prospectus for its Nasdaq share offering, Oatly said it could seek a second listing in Hong Kong if its status as a US public company had a “material adverse effect” on its leading shareholders.

Explaining why it had agreed the provision, Oatly cited the possibility that the US government could make it hard for the group to share information with a state-owned company and might prevent China Resources from placing its representatives on the Oatly board, or even force it to divest.

The company also said it could pursue a Hong Kong listing if it generated more than 25 per cent of its revenue from sales in the Asia-Pacific region for two consecutive fiscal quarters.

The prospectus detailed how Oatly has been able to rapidly expand its presence outside Europe, with Asia and the Americas contributing a combined $150m, or 36 per cent of total revenues, last year compared to $50m, or 24 per cent, in 2019.

Oatly’s products are now sold at more than 9,500 shops in China, three years after launching in the country. In the US, Oatly products can be found at 7,500 retailers and in more than 10,000 coffee shops.

The relationship with China Resources attracted controversy when the group invested in Oatly with Verlinvest in 2016, prompting Swedish media to highlight China’s environmental and human rights record.

“It’s difficult to have a large float without Chinese investors being involved these days,” said one small Oatly shareholder from a venture capital firm.

Malmo-based Oatly has grown on the back of the popularity of plant-based milk alternatives across the globe and is pushing for a $10bn valuation from the Nasdaq float, according to people familiar with its plans.

An investment round last year led by Blackstone valued the oat milk maker at $2bn. Oatly’s other investors include television host Oprah Winfrey and rapper Jay-Z’s Roc Nation.

The prospectus confirmed earlier revenue estimates of more than $400m in 2020 — $421m to be precise, up from $204m in 2019 — though losses widened from $35.6m to $60.4m.

International expansion has focused on the specialty coffee market, with its “barista” milk which froths like cow’s milk. Oatly has also expanded into making and selling plant-based ice cream and yoghurt, although its oat milk made up 90 per cent of revenue last year.

The company said it was planning to raise $100m in its initial public offering, a place holder number that is likely to change. Morgan Stanley, JPMorgan and Credit Suisse are leading the offering.



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Grab co-founder set to dramatically increase voting rights with Nasdaq listing

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Malaysian internet entrepreneur Anthony Tan is set to dramatically increase his control over his company Grab when the south-east Asian tech group joins Nasdaq later this year.

In a move that would be the envy of his Silicon Valley peers, the Grab chief executive and co-founder will have 60.4 per cent of the voting power in the company while owning a stake of just 2.2 per cent.

This is a feat comparable to that of Facebook’s Mark Zuckerberg and unprecedented for a deal involving a special purpose acquisition company.

The holdings were contained in papers filed last week after the Singapore-based company unveiled a record deal to combine with a New York-listed Spac launched by Altimeter, a Silicon Valley group, valuing the business at almost $40bn.

The filing also revealed that the company, whose superapp offers everything from ride-hailing to deliveries and financial services, has reported potential violations of anti-corruption laws to the US Department of Justice.

Proponents say Tan needs the control to make quick and difficult decisions in navigating Grab’s eight markets. The deal is a crucial test of international investor appetite for a tech company with operations sprawled across the vastly diverse and emerging region of south-east Asia.

Bar chart of % of voting power showing  Anthony Tan will have majority voting control at Grab

But his grip on the SoftBank-backed company’s direction marks the first time a Spac deal has entrenched a founder’s voting rights to this degree, say experts.

Such an overriding majority voting right for a chief executive is “unprecedented” for a company seeking a Spac route, said Robson Lee, a partner at law firm Gibson Dunn. “While it is not unusual for high tech companies seeking a listing to entrench management shares with additional voting rights, a 60 per cent absolute majority will be the first in the market,” Lee said.

Others put it more bluntly.

“By bypassing a traditional IPO, Grab has attracted less scrutiny over Anthony’s control,” said one investment banker with direct knowledge of the deal.

While common in the tech space, such arrangements are not always popular, as evidenced by the backlash against Adam Neumann, WeWork’s messianic co-founder, and shareholder protests faced by Zuckerberg, who holds about 60 per cent of the voting power at Facebook.

Details of Tan’s control did not surprise Grab’s rival, Indonesia-based super app Gojek. Merger talks between the two companies were abandoned late last year before Grab began considering a Spac merger, and people close to the talks said Tan had demanded control indefinitely as a “CEO for life”. Grab has denied the reports.

One long-term Grab investor said that Tan, who comes from one of Malaysia’s wealthiest families, “needs a high level of power” to negotiate a seat at the table at the region’s messily interlinked world of family-run conglomerates, politics and regulation.

“The issue is south-east Asia in itself is not a homogeneous market . . . It’s a collection of different markets with their own sets of regulatory considerations,” said Lawrence Loh, director of the Centre for Governance and Sustainability at the National University of Singapore.

In its filing, Grab outlined several risks including an investigation it launched into potential violations of anti-corruption laws related to its operations in one country. The company reported the potential violations to the DoJ but declined to comment on them when contacted by the Financial Times.

The onus is on Grab and Tan to justify the dichotomy between ownership and voting shares and prove it is in the interest of the shareholders, said Nirgunan Tiruchelvam, head of consumer sector equity research at Tellimer Group.

“If he can argue that such a disproportionate share of voting would be beneficial to shareholders and add value for further direction of the company, then it’s possible shareholders would be comfortable with it.”

But even key shareholders have had their voting power diluted via the dual-class share structure — similar to Facebook. SoftBank, Grab’s biggest shareholder, has an 18.6 per cent stake that will translate to just 7.6 per cent voting power. Uber’s 14.3 per cent stake has a 5.8 per cent voting power and Didi Chuxing’s 7.5 per cent stake, just 3.1 per cent.

“For now we are just happy with the liquidity, but longer-term we want to see genuine progress towards profitability,” said one investor.

That is still years away. Grab has lost money every year since its inception in 2012 as it has grappled with other well-financed competitors. Accumulated losses hit $10bn at the end of 2020. Last year it reported a net loss of $2.7bn against net revenues of $1.6bn and it does not expect to break even until 2023.

Column chart of Net losses ($bn) showing Grab as a whole is still not profitable

On top of that, Grab has not said if it will appoint any independent board directors, nor does its filing say what checks and balances are placed on Tan. Information on succession or who inherits Tan’s stock has not been released.

“Further details will be in the F-4 registration statement that will be filed with the SEC [the US Securities and Exchange Commission], and to comply with this regulatory process, we will not be able to share more until the F-4 is finalised,” Grab said in a statement.

Jeffrey Seah, a partner at Singapore-based venture capital firm Quest Ventures, said: “While he has supervoting rights, he has kept his management team intact. That is a [type of] check and balance.”

But even the supervoting shares held by Grab’s co-founder Tan Hooi Ling and president Ming Maa will be beneficially owned by Tan under a deed that will be entered at the time of the merger.

So far, Grab’s big-name investors seem happy to back Tan. Funds investing in the deal include BlackRock, T Rowe Price, Fidelity, Janus Henderson, Abu Dhabi’s Mubadala, Singapore’s Temasek, Malaysian fund Permodalan Nasional Berhad as well as a number of wealthy Indonesian family offices.

The test will come when Grab joins the Nasdaq, said Loh. The deal has been approved by both Grab and Altimeter Growth boards, and it could close by July.

“The moment of truth will be when we discover the listing price and when it’s actually traded . . . If there are concerns, all investors will probably give it a discount,” he added.

mercedes.ruehl@ft.com and stefania.palma@ft.com



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VCs/start-ups: IPO mania raises funding and valuations

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Against the odds, 2020 was an extraordinarily good year for tech start-ups and venture capitalists. This year is going to be even better. 

A boom in initial public offerings has handed some of the biggest names in venture capital lucrative exits. Add in low interest rates, stock markets at record highs, optimism surrounding economic recovery and the rapid digital transformation of multiple sectors and money is flowing freely. The first quarter of 2021 set a new record for global venture funding, with $125bn raised around the world, according to data from Crunchbase. Early-stage funding rose by almost half compared with the previous quarter, to more than $35bn.

Doom-laden warnings of down rounds and a freeze on funding last year have been squashed. Sequoia Capital last spring told companies in its portfolio that private financings could soften “significantly”, calling coronavirus the black swan of 2020. Yet funding and listing postponements were shortlived. Even start-ups without sales, aka “pre-revenue” companies such as aerospace start-up Archer Aviation, are in demand thanks to the rise in special purpose acquisition companies (Spacs) searching for targets.

Charts showing deal value of first-quarater IPOs, including Spacs in the US; global venture capital early-stage investment; and top 10 private companies valued at more than $1bn

In the first quarter of 2021, 398 US companies joined markets via initial public offerings, up from just 37 last year. Three-quarters were Spacs. Even excluding the Spac frenzy, the first quarter eclipsed the past five years. This does not include direct listings of Roblox and Coinbase either.

Listing mania has allowed VC firms such as Sequoia and Andreessen Horowitz to cash out on long-term bets and gather more funding firepower. This has already had an impact on valuations. Last year, 121 companies joined the elite group of start-ups valued at $1bn or more, according to CB Insights data. In the first three months of 2021, 78 companies hit the same target. Around the world there are now more than 600 such unicorns, led by China’s ByteDance, which is backed by Sequoia Capital China, and payments processor Stripe, which counts Andreessen Horowitz as an investor.

More money chasing start-ups means higher valuations. The result is likely to be a greater concentration of private fundraising by the small group of VCs who are able to keep up.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up



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