Groupon Propped Up With Lowest Internet Float in a Decade
Groupon Inc. is selling fewer shares in its initial public offering than any U.S. Internet company in the past decade, creating a higher valuation than some investors say the online-coupon provider deserves.
The Chicago-based company is offering 4.7 percent of its stock, less than any U.S. Internet-company IPO of more $200 million since at least 2000, according to data compiled by Bloomberg. Google Inc. sold a 7.2 percent stake in its 2004 IPO. LinkedIn Corp. offered 8.3 percent of its shares in May.
“What Groupon is doing is way outside what should be acceptable,” said Josef Schuster, founder of Chicago-based IPOX Schuster LLC, who oversees $2.5 billion and is weighing whether to order the stock. “They’re using a low float to keep up the valuation, but it’s really outside what you historically have had in U.S. IPOs.”
Groupon is seeking a valuation of as much as $11.4 billion, making the unprofitable company more expensive than Amazon.com Inc. (AMZN) and Microsoft Corp. (MSFT) relative to 2012 sales estimates. The small offering size also leaves the shares more vulnerable to large price swings and carries the risk of greater dilution when founders and venture-capital backers sell stock later.
Pandora Media Inc., the online radio service that sold 9.2 percent of its shares in an IPO in June, jumped 8.9 percent on its trading debut, only to slump 24 percent the following day. As of yesterday, the shares traded 7.4 percent below the offering price.
‘Juice the Price’
In a typical IPO, investors receive shares worth 20 percent to 25 percent of the company, according to Paul Deninger, a senior managing director at investment bank Evercore Partners Inc. (EVR) in San Francisco who isn’t involved in the Groupon sale.
“The small float in attempt to juice the price is a concern,” said Wayne Wilbanks, chief investment officer at Wilbanks, Smith & Thomas in Norfolk, Virginia, which manages about $1.8 billion. “It’s a double-whammy: a combination of excessive valuation and a small float.”
Julie Mossler, a spokeswoman for Groupon, declined to comment on the stock offering.
Groupon seeks to raise as much as $540 million offering 30 million shares for $16 to $18 apiece, according to its filing with the U.S. Securities and Exchange Commission. Net proceeds of about $479 million may be used for acquisitions, the filing shows, though no specific plans are outlined.
The company is meeting investors this week to pitch the IPO, which is scheduled to price on Nov. 3. If demand is greater than expected, Groupon could increase the number of shares offered or raise the price. LinkedIn boosted the top end of its range by 29 percent. Those shares jumped 109 percent on their first day of trading and are still trading about double the IPO offer price.
A rising stock market can encourage companies to expand their offerings. The Standard & Poor’s 500 Index rallied 17 percent from Oct. 3 through yesterday, when volatility hit a two-month low.
Other companies are also pursuing low-float strategies. Zynga Inc., the top developer of games for Facebook Inc.’s site, is planning to sell less than 10 percent of its stock, a person with knowledge of the matter said in June. That offering is scheduled to be completed before the Nov. 24 Thanksgiving holiday, people familiar with the process said this week.
Groupon is seeking a valuation of about 5 times projected 2012 sales of about $2.1 billion, people familiar with the plans said earlier this week. That’s more expensive than Amazon.com, the world’s largest online retailer, which trades at about 1.5 times estimated 2012 revenue. Microsoft, the biggest software maker, is also cheaper, trading at 2.9 times projected revenue.
“My bearishness is first and foremost the valuation, which looks excessive, regardless of whether it trades up 30 percent or 40 percent after the offering,” Wilbanks said.
Groupon reported a net loss of $10.6 million attributable to the company in the three months through September, bringing losses in the first nine months of the year to $214.5 million, according to its filings.
Some investors are overlooking the losses to get into a growing market for online coupons. While Groupon faces competition from rivals such as LivingSocial.com, it still has the biggest brand name among daily deal sites, said Tim Cunningham, who helps oversee about $75 billion at Thornburg Investment Management Inc. in Santa Fe, New Mexico.
“If you’re interested in getting into the space, Groupon is clearly the best way to play it and the only way to play it for a while at least,” Cunningham said.
Groupon would probably have struggled to get the same valuation attempting to raise funds from venture capitalists, said IPOX’s Schuster. Groupon had discussed a valuation of $25 billion with bankers in March, people with direct knowledge of the matter said at the time.
“No VC is going to value the company like that right now,” said Schuster. “Why don’t they just go to a VC firm? They don’t go there because they can’t sell it. The stock market is a means for them to do that.”
Groupon’s last round of financing in January valued the company at about $4.75 billion, people with knowledge of the matter said at the time.
New Enterprise Associates, Groupon’s earliest venture capital investor, owns 14 percent, and Accel Partners has 5.2 percent. Groupon Chairman and co-founder Eric Lefkofsky is the biggest shareholder, with 20 percent of the common stock, the IPO prospectus shows. Co-founder and Chief Executive Officer Andrew Mason owns 7.4 percent.
Keirsten Lampkin, a spokeswoman for Accel Partners, declined to comment. A spokeswoman for NEA didn’t respond to a request for comment.
Existing shareholders are restricted by a so-called lockup period from selling their stock until at least 180 days after the offering, according to the prospectus. All of the shares in the IPO are being sold by Groupon.
Morgan Stanley, Goldman Sachs Group Inc. and Credit Suisse Group AG are leading Groupon’s offering. The stock will trade on the Nasdaq Stock Market under the symbol GRPN.
“Markets are going up now, so it works in their favor, but it may not work out in the long run in favor of the investor,” IPOX’s Schuster said.
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