Welcome to the Fixed-Price IPO


The bidding for London’s next big IPO starts and ends at 4.5 billion pounds ($5.9 billion).

The owners of The Hut Group Ltd. are so confident in the e-commerce company’s initial public offering, they aren’t going to haggle. Investors who want a piece must take that valuation. The traditional process of setting a range, narrowing it down and letting market demand determine the final number won’t apply here.

Hut knows full well it’s a seller’s market for assets that have a technology theme and can demonstrate resilience to the pandemic. The company has two online businesses, one in cosmetics, the other offering protein shakes, snacks, vitamins and sportswear. It also sells its e-commerce platform to consumer multinationals such as Nestle SA. Sales have accelerated in the pandemic, growing 36% year-on-year in the first half of 2020.

Assume that growth continues and margins hold steady. Underlying Ebitda could then plausibly be around 140 million pounds this year. The roughly 5 billion-pound valuation on a debt-free basis is 36 times that expected profit measure. That’s in line with e-commerce giants Amazon.com Inc. and JD.com Inc., but a big premium to cosmetics groups like L’Oreal SA and Coty Inc.

There is some opportunism in Hut’s listing, but the move also suggests the private capital markets would rather take profits now than finance the next leg of growth. The stock market will provide some backers with an exit, as well as nearly 1 billion pounds to cut leverage and put the company in a net cash position.

That future expansion will be driven increasingly by the currently small technology services business, based on Hut’s divisional growth targets. Its roster of partners points to the value of its platform. And a stable of wholly owned brands provides a moat against competition on the cosmetics side, which is growing faster than nutrition.

But these are still very competitive markets. The company’s statement that its recent performance shows cosmetics are “non-discretionary” is dubious. A lot of investment and acquisitions lie behind Hut’s phenomenal expansion. The three-year record is littered with one-time charges and losses at the pretax level. Growing revenue at 25% has not come for free.

Tech investors don’t care about this year’s results. They also tolerate undemocratic oddities such as the veto that founder and lead shareholder Matthew Moulding will have over hostile takeover bids in the medium term.

The fixed IPO price suggest a high degree of confidence that there are buyers out there at the mooted price, and it gives Hut’s owners certainty over the valuation now. But they won’t control the price after IPO.

Some investors will still recall the London market’s IPO boomlet of 2014, when e-commerce pioneer AO World Plc was setting out a similar stall, a founder-led business with sales growth of 30% from online domestic appliances. It too sold its know-how to third parties. Its shares had nearly halved by the end of the year. Some on Hut’s very long list advisers worked on that deal. Hopefully they can avoid a repeat.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2020 Bloomberg L.P.

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