Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

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

Rocket Internet has put one of its four unicorns out to pasture. Selling most of its stake in Asian online retailer Lazada to China's Alibaba can be seen as an admission that the German web investor couldn't get it in a strong enough shape on its own for a flotation.

This may be the right decision, given Rocket's financial needs elsewhere and the fact that Lazada was at least two years away from IPO. Alibaba is a strong operational and financial partner. Plus tech start-ups have been struggling to raise money at attractive valuations, so the sale means avoiding painful rounds of ever more dilutive fundraisings.

But it must sting for Rocket CEO Oliver Samwer to let others take the reins at Lazada, founded by his company in 2012. He conceives of Rocket as being different to a venture capital fund, with its 250 engineers in Berlin attempting to bring to maturity companies working from food delivery to fashion.

In reality, though, it's hard to see it as much more than a VC that happens to be listed, which only makes money when it floats companies or sells them. The difficulty of running this model -- with its highly uncertain income flows -- in the glare of public markets has made Rocket a favorite target of short-sellers and left its shares about 40 percent below their IPO price.

Damp Squib
Rocket shares are well below their IPO price
Source: Bloomberg

The terms of the deal are so-so. Rocket is selling slightly less than half its 23 percent stake in Lazada for $137 million, putting an equity value of $1.5 billion on the business. Alibaba is buying stock from Sweden's Kinnevik and Britain's Tesco too, and after another $500 million capital injection will own more than half of Lazada, giving it control. So Rocket will be left with 8.8 percent of a recapitalized company worth $2 billion, a holding worth $176 million, taking the total deal proceeds to $313 million.

That's a 36 percent premium to the $230 million where Rocket valued its stake a year ago. While Rocket has a reduced holding, it is now co-invested with one of Asia's most powerful tech firms -- not a bad place to be. Still, the premium looks disappointing. It's the least you'd expect for a change of control, with nothing on top for growth. Tech investors seek better returns than this.

Lazada Losses
Source: Jefferies Research, company reports
* For first nine months of 2015

So why do it? Rocket may figure it's better off using the proceeds to invest in its other companies, such as grocery delivery specialist Hello Fresh or Global Fashion Group.

The company says it won't use the money to buy back some of a 550-million euro convertible bond issued last year, which is a change since the proceeds of its last asset sale went to do just that. That bond was unpopular with equity holders since it diluted them, while also leading more hedge funds to short the stock.

In a perfect world, Samwer would have nurtured Lazada and taken it public, earning a bigger upside. In the real world, Rocket's made a choice to sell one unicorn to help feed the others.

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

To contact the authors of this story:
Leila Abboud in Paris at labboud@bloomberg.net
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net