Category: IPO Insights & Trends

Prince Mohammed, the next in line for the throne of Saudi Arabia, broke the silence about Aramco in an interview released this past weekend. He spoke with Asharq Al-Awsat, a Britain-based but Saudi owned news site, and the interview was translated by Arab News, the English language Saudi daily. This is the first mention we have had of the Aramco IPO from the Saudi government or the company in several months. 

Now Prince Mohammed says, “We are committed to the initial public offering of Saudi Aramco… I expect that it will happen between 2020 and the beginning of 2021.” He has changed his projections for an IPO several times since he first announced its likelihood in an interview with The Economistat the start of 2016. While it was first expected in 2017 or 2018, the IPO has slowly been pushed back with later projected dates given every few months. Nevertheless, Aramco executives and personnel from the Energy Ministry have consistently insisted that the IPO is “on track.” The young and anxious prince just gave the most details about IPO plans in more than 6 months.

Mohammed’s original projections for an Aramco IPO were never feasible. The company could not be ready before late 2019 at best, because before 2016, Aramco didn’t keep its books according to international standards. It wasn’t until the end of 2018, that Aramco had 3 years of appropriately-kept books—essentially a requirement before an IPO. Moreover, before the IPO idea was broached there was no formal paperwork delineating the corporate structure, incorporation or bylaws. There likely was no written concession agreement granting the company access to the oil reserves by the kingdom. These all needed to be created, and that only happened in 2018. Therefore, the early plans for an IPO by 2018 or earlier were never realistic. 

But the prince’s original intent for an IPO was to provide cash for the Public Investment Fund (PIF), which is the kingdom’s sovereign wealth fund. The PIF has been around for almost 50 years, but it has been relatively small. Mohammed bin Salman plans to turn it into a giant investment vehicle. He has said that once he moves ownership of Aramco to the PIF, the PIF would have a value of two to three trillion dollars. He originally envisioned selling five percent of Aramco at a two trillion dollar valuation, which would infuse his investment fund with $100 billion in cash.

Back in 2016 and 2017, Mohammed bin Salman’s PIF needed cash as it sought to invest in trendy startups, as well as Saudi projects like recreation concepts, real estate and planned mega-cities. An Aramco IPO was supposed to provide that cash. But new developments indicate that perhaps an Aramco IPO is no longer a serious endeavor, most likely because the PIF may not even need the cash right now.

Circumstances have changed. The PIF decided to sell the shares it owned in Saudi Petrochemicals giant SABIC to Aramco for $70 billion, though that sale won’t go through until next year. It began taking loans in 2018 to provide much needed immediate cash as well. It backed out of a $45 billion commitment to SoftBank’s Vision Fund II, and several companies decided to refuse discussed investments from Saudi Arabia following the Saudi public relations nightmare that resulted from the murder of Jamal Khashoggi. Moreover, the PIF may be rethinking its strategy of investing in hot start-ups after the UBER IPO bombed and Saudi Arabia’s late-stage investment didn’t bring in nearly as large as a return as the PIF had probably hoped it would.

There are still good reasons to take Aramco public,  but they don’t offer any special benefits to prince Mohammed or his father, the king. For one, Aramco’s new charter allows the company to grant shares to its employees. If it did this and then went public, it could be a huge bonus for employees and a potential incentive to retain talent. This would also function like a kind of post-IPO domestic stimulus for the Saudi economy, as it would infuse capital into Saudi Arabia’s private sector.

For Aramco, an IPO would provide some reassurance that the monarch and government would not act capriciously toward the company. Aramco’s traditional independence has been imperiled in recent years. Though only five percent of the company may be listed, at least initially, the disclosure rules and public feedback that come with a public listing would help balance the risks of Saudi Arabia’s authoritarian rule. 

Regardless, it does seem that perhaps the Saudi monarchy and the PIF are no longer desperate for the cash an Aramco IPO would provide. An Aramco IPO may very well happen, but it may not happen until the prince, the government or the PIF needs cash again.

Another note: last week, news came that SABIC is embarking on a partnership with Exxon in the US. But there was no clarification of who was behind this move. In 2020, Aramco is supposed to take ownership of 70% of SABIC, but currently the PIF still owns and controls it. It is possible both the PIF and Aramco approve of this deal, but the news was unclear. If Aramco was not part of the negotiations or at least consulted throughout the process, it raises more questions about whether Aramco is simply being forced to buy SABIC and whether Aramco is losing its historic independence from the government. 

Source: Ipo Search Results
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A look at some of the key business events and economic indicators upcoming this week:

HOUSING BELLWETHER

The government’s monthly snapshot of U.S. housing starts should provide insight into the state of the new-home market.

The Commerce Department is expected to report Tuesday that builders broke ground on new single-family homes and other residential housing projects at a faster pace in May than in the previous month. U.S. home construction accelerated in April, led by an uptick in single-family homes.

Housing starts, monthly, seasonally adjusted annual rate:

Dec. 1,142,000

Jan. 1,291,000

Feb. 1,149,000

March 1,168,000

April 1,235,000

May (est.) 1,250,000

Source: FactSet

THE FED SPEAKS

The Federal Reserve delivers an update on interest rates and the U.S. economy on Wednesday.

The remarks will follow a two-day meeting of the central bank’s policymakers. The Fed is facing pressure to cut its key short-term rate amid signs of slowing economic growth. Many stock market investors worry that the U.S. trade war with China will hurt corporate profits, and expect the Fed to cut rates at its meeting in July.

SLACK IPO

A popular messaging platform is set to go public.

Slack Technologies is expected to make its stock market debut Thursday. The company plans to list on the New York Stock Exchange under the ticker “SK.” Slack’s IPO follows those of Pinterest, Lyft, Uber and Zoom.

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Thanks to a big IPO on the Hong Kong Stock Exchange, a Chinese couple have become China’s richest husband-and-wife team.

The initial public offering of Hansoh Pharmaceutical Group, which closed up 37.3% on its debut on Friday, made Chairwoman Zhong Huijuan China’s third-richest woman. Zhong’s husband, Sun Piaoyang, is already worth $9.8 billion, according to Forbes. 

Together, Zhong and Sun have a $19.5 billion bank balance, which would make them wealthier than the Sackler family that owns OxyContin-maker Purdue Pharma, at $14 billion. They’re also worth considerably more than Robin Li and Ma Dongmin, the husband-wife team who run Baidu  (BIDU) and previously China’s top power couple, worth US$8.8 billion.

Zhong owns 68% of Hansoh, which now has a market capitalization of $14.2 billion in U.S. dollars. That values her stake at $9.7 billion. Among China’s wealthiest women, only the property developers Yang Huiyan of Country Garden Holdings (CTRYY) and Longfor Properties (LGFRY) chairwoman Wu Yajun are worth more. Not bad for Zhong, who quit her job as a chemistry teacher to enter the drug business.

Zhong is riding the rapid growth in China’s pharmaceutical industry, as the country concurrently gets richer and older. Revenue for Hansoh rose 24.8% in 2018, to $1.1 billion. Profits climbed 19.2%, to $275 million.

The company generated roughly $1 billion from the IPO. Singapore’s sovereign wealth fund GIC is one of the cornerstone investors. Hansoh plans to use 45% of the IPO money to invest in research and development, with a quarter of that to build improved as well as new product lines. An additional 20% goes to sales promotions, and 10% will be kept as working capital.

Sun has led another drug company, Jiangsu Hengrui Medicine, since 1990. He has turned it from a state-owned company founded in 1970 into a highly profitable maker of medicine to combat cancer, with a small-molecule drug treatment for advanced gastric cancer, as well as cardiovascular disease, inflammation and central-nervous system conditions.

In May 2018, Forbes named Jiangsu Hengrui No. 64 out of the 100 most-innovative companies in the world. But that did not help Jiangsu Hengrui’s market value. It was a torrid year for the stock, which lost 35.1% between May and the end of the year. The shares have advanced 39.4% so far in 2019, considerably bigger than Hansoh as a US$39.2 billion company.

Hansoh Pharmaceutical makes anti-infection and anti-tumor drugs, too, generating around half of sales from cancer treatments. It is far more accessible to overseas’ investors, thanks to its Hong Kong listing, than Jiangsu Hengrui, which went public in 2000 with a listing in Shanghai.

Investors have clearly not been deterred by an investigation that the Chinese authorities have launched into potential kickbacks paid by drugmakers to doctors and hospital administrators, to get their drugs used.

Hansoh Pharmaceutical is on the list of 77 pharmaceutical companies released earlier this month that China’s National Healthcare Security Administration and the Ministry of Finance are investigating. The Chinese arms of Sanofi (SNY) , Eli Lilly (LLY) and Bristol-Myers Squibb (BMY) are also on the list.

There’s suspicion that the embarrassment over the U.S. college admissions scandal may have prompted the investigation. The biggest bribe allegedly paid to college consult Rick Springer in the “Varsity Blues” case came from Zhao Tao, the chairman of Shandong Buchang Pharmaceutical, which is also on the list. Zhao says he was acting in a private capacity when he helped his daughter, “Molly” Zhao Yusi, get into Stanford University.

Springer allegedly paid a half million dollars to the Stanford University sailing team, and tried to get Molly Yao recruited to the team. He allegedly pocketed the rest of the $6.5 million paid by Zhao. The former Stanford sailing coach John Vandemoer reportedly pleaded guilty to racketeering, this week receiving a sentence of a day in prison, a $10,000 fine, and two years of supervised release. Stanford fired him after his plea.

It is the first conviction in the case, which has been an embarrassment in China, where aggressive parents will go to great lengths to push their children’s education. The second-largest alleged payment, of $1.2 million to get a student into Yale, also came from a Chinese family.

But there are also problems within the Chinese pharmaceutical industry itself. Doctors say it is common practice to supplement your income by accepting “grey money” from drug companies to push their products.

A maker of traditional Chinese medicine, Kangmei Pharmaceutical, said in April that it had overstated its cash holdings by as much as $4.3 billion. That led to a regulatory probe, with China’s stock watchdog finding the company used related parties to manipulate its shares.

Hansoh may come under a more-generic form of pressure as a result of the investigations. The Chinese government is on a long-term push to drive down the price of drugs. The government says it will instigate a second round of Group Purchase Organization price cuts for the national health service by September.

That would put pressure on margins at drugmakers. Those with proprietary treatments would likely fare better than those making generics. But Jiangsu Hengrui reportedly saw the price of its hypertension drug Irbesartan slashed 60% in a round of cuts in December.

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Source: Ipo Search Results
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The stock of Chewy (NYSE:CHWY) was delighting investors in its market debut today. The online pet products seller, whose shares were priced at $22 last night, saw its stock jump 64% to $36 in its first trade, and it climbed as much as 88% to $41.34 during the trading session.

The stock closed up 59% at $34.99 per share. 

Demand for the fast-growing e-commerce company appeared to be building in the run-up to today’s IPO as underwriters hiked the pricing range for the stock from $17 to $19, to $19 to $21 earlier this week, before finally pricing at it $22 a share, giving it a valuation before its first trade of $8.8 billion. However, Chewy only raised $122 million from the offering as the vast majority of the 41.6 million shares that went on sale belonged to PetSmart, the brick-and-mortar retailer that owns a majority of Chewy, after acquiring it in 2017. That would seem to indicate that the purpose of the IPO was primarily to allow PetSmart to cash out. 

It will remain the majority shareholder, controlling about 70% of the shares outstanding and 77% of the voting rights. The retailer sold about $800 million worth of its Chewy stock in the offering and now owns 70% of a company worth about $14 billion after today’s surge. 

Image source: Getty Images.

A warm welcome

Chewy’s surge is the most recent sign that investors remain hungry for new IPOs as the company joins Beyond Meat, Zoom Video, and Pinterest as market debuts that have soared in their opening days this year. This response indicates that the market is keen on the intersection of e-commerce and pet products as both sectors have a number of appealing qualities for investors.

E-commerce stocks, including Amazon.com, Etsy, Wayfair, and MercadoLibre, have been some of the biggest winners on the market in recent years as online retail has enormous growth potential as the channel should continue to take share from brick-and-mortar retailers. Despite Amazon’s prowess, American e-commerce companies that have proven their ability to carve out their own niches in online retail, like Etsy, Wayfair, and now Chewy, have been rewarded by investors even if profits have been hard to come by.

Pet products, meanwhile, have proven to be one of the most resilient industries. Pet food and accessories were one of the few categories to see sales rise during the financial crisis as Americans have shown a willingness to spend on their pets even in tough times. The industry has little seasonality, making it easy to plan for and to allocate resources, allowing companies like Chewy to maximize their efficiencies. It has capitalized on this with its subscription plans as two-thirds of its sales now come from its “autoship” customers, who make up a substantial portion of its base of more than 10 million customers.

Furthermore, the pet products industry is expected to outgrow the overall economy, increasing by a compound annual rate of 4.2% through 2022 as more Americans become pet owners and current pet owners spend more on their furry friends. Chewy brought in $3.5 billion in revenue last year and is targeting a $70 billion pet market, giving the company plenty of room for growth. 

At a market cap of about $14 billion, Chewy shares look pricey following today’s surge. The company is now worth more than Etsy, at $8 billion, and about the same as Wayfair, which is worth around $14 billion but has double the revenue of Chewy. Petmed Express, the only other pure-play pet stock on the market, is valued at just $350 million.

Chewy is not profitable, and acknowledged in its prospectus that it may never achieve profitability. Its revenue is growing fast, up 45% in its most recent quarter, but that clip also decelerated significantly from the 67% rate it saw in 2018.

Whether Chewy succeeds over the long term remains to be seen, but for today at least, the company wins best in show in the minds of investors.

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The Intellectual Property Owners Association (IPO) will offer a one-hour webinar entitled “Doctrine of Equivalents: Tips for Plaintiffs, Defendants, and Patent Prosecutors” on June 18, 2019 from 2:00 to 3:00 pm (ET).  Brian Coggio of Fish & Richardson, Mark Feldstein of Finnegan, and Sailesh Patel of Schiff Hardin will provide insights regarding the doctrine of equivalents (DOE) for litigators, and also highlight prosecution pitfalls that can lessen the chance of the patentee proving infringement by the DOE in the future.  The panel will analyze decisions including Duncan Parking Technologies, Inc. v. IPS Group, Inc., Enzo Biochem Inc. v. Applera Corp., Mylan Institutional LLC v. Aurobindo Pharma Ltd., and discuss:

• How limitations on DOE play a role, and difficulties plaintiffs face in making a case for the DOE;
• Trying to find vitality in the DOE, such as by successfully applying the “function/result/way” or the “insubstantial difference” test; an
• The danger to successful plaintiffs from the “ensnarement” doctrine, which has seen increased application and can play out as a trial within a trial.

The registration fee for the webinar is $135 (government and academic rates are available upon request).  Those interested in registering for the webinar can do so here.

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Upwork (NASDAQ:UPWK) was a broken IPO at Wednesday’s close. It was fixed a day later. The only difference in those 24 hours — the event that likely spurred the 8% pop in the stock on Thursday that pushed the shares back above last year’s $15 IPO price — is that Fiverr International (NYSE:FVRR) went public in a wildly successful debut. Both companies operate online platforms to provide freelancers with opportunities for work.  

Fiverr priced its IPO at $21. The online marketplace for odd jobs across 200 different digital-services categories opened at $26 on Thursday, and it continued to coast higher throughout its first day of trading. The stock ultimately closed near $40, up a blistering 90% for its debut. As another proxy for the gig economy, Upwork also moved nicely higher for the day.

Upwork investors won’t mind riding Fiverr’s coattails for a day. It was a hot debutante once, too. It opened at $23 in its first day on the market eight months ago. In March, it peaked at $25 — 67% ahead of its early October IPO — but it’s been a market laggard ever since. Upwork stock has been trading in the teens through the past 10 weeks, and lately it’s been weaving over and under its original $15 price tag. 

Image source: Upwork.

Getting the job done

Fiverr and Upwork may be engines for the gig economy, but the models are fairly different when it comes to the buyer profile. Fiverr’s appeal is largely for time-strapped consumers or skill-strapped professionals who need someone to perform a one-time digital task. Upwork is geared more toward small businesses that want to farm out work that may develop into ongoing contractor relationships.

Fiverr has evolved from its original model — which, true to its name, involved various odd tasks that one would be willing to do for just five dollars. Pricing is now all over the map, and naturally the depth of the services provided has also expanded. The numbers still bear out the differences. 

Upwork is much larger than Fiverr, dishing out $1.8 billion of work last year; buyers contracted out $293.5 million of jobs through Fiverr. Because Upwork relies on establishing ongoing working relationships after the initial connection is made, its fees decline on repeat jobs. Upwork’s take rate worked out to 14.2% in its latest quarter, well below the 25.7% take rate at Fiverr. 

In terms of growth, the smaller Fiverr gets the upper hand here. Revenue rose 45% at Fiverr last year, decelerating slightly to 42% through the first three months of 2019. Upwork’s top-line results rose 23% last year, slowing to 16% in its latest quarter. Eyeing the other end of the statement, both companies are still posting losses on a reported basis, though after widening deficits in 2018, Fiverr and Upwork saw the red ink contract in the first quarter of this year. 

When it comes to top-line valuations, Upwork is the bargain here. It may not seem cheap trading at six times trailing revenue, but Fiverr’s multiple is substantially higher. There will be 31.8 million ordinary shares outstanding after underwriters exercise their option to buy additional shares — and they will, given that the stock is catapulting well above its $21 IPO price. This tags Fiverr with a market cap of nearly $1.3 billion, or more than 15 times its trailing top-line results. 

In short, Upwork investors will want to cheer Fiverr on at this point. If the market justifies nosebleed valuations for Fiverr, it will open the door for multiple expansion for Upwork shares. Fiverr fixed Upwork’s broke IPO on Thursday, and the coattails are still there for the riding.

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Source: Initial Public Offering Search Results
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Source: Initial Public Offering Search Results
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