WHARTON PRIVATE EQUITY & VENTURE CAPITAL Volume 1 / Issue 12 UBER FOR BIKES: THE NEXT $68 BILLION DOLLAR IDEA
IN THIS ISSUE: 1. Uber for Bikes 2. MuleSoft IPO 3. Softbank Acquires Fortress Group 4. Investors Flock Around GOOS 5. Advent International Makes Offer for STADA
When Uber sprang onto the scene less than 10 years ago as another hot new startup out of Silicon Valley, no one would’ve guessed that it would be worth upwards of $65 billion after garnering nearly $13 billion of funding. However, as the economy has fundamentally transformed since 2009, Uber’s business model has been shockingly effective. The sharing economy – one in which full ownership is less and less common – has highlighted the importance of services themselves over the vehicles that accomplish them. There are people who like driving and care about car ownership, but for the vast majority of people, cars are merely tools for the service of cheap and convenient transportation. As the world, and particularly the developing world, rapidly becomes more urbanized, transportation becomes a complex problem. Public transportation strains under the pressure of demand, and cars become impractical on clogged city streets. Every country is finding its own solutions to their increasing transportation concerns, and Uber recently found out the hard way that not every country wants then same thing. Their excursion into China recently led to complete defeat as Didi Chuxing – then a $28 billion company – bought out Uber’s business in China for $7 billion. However, it looks like Didi is facing new problems as an old, cheaper form of transportation is being aggressively brought back. Denser cities mean bikes can become cheaper alternatives to cars and public transportation. However, owning a bike can be expensive for individuals in developing countries, and the bike sharing systems in many western countries that involve “stations” that bikes need to be parked at are complicated, inconvenient, and not very widespread. Here is where Ofo, Mobike, and many other bike-sharing companies solve the problem. These companies have simple apps that allow users to either scan a barcode or unlock a lock to ride a bike. The bikes, brightly colored and simple, can be left absolutely anywhere, meaning that there is an incredible amount of convenience for the average user. In just a few years, these bikes have taken over China’s city streets and fundamentally altered the transportation landscape in Beijing, Shanghai, and beyond.
Author Jason Cohen Class of 2020 cohenjas@wharton.upenn.edu
While the growth has been rapid, the margins are razor thin. Making just one yuan, or $0.14, every half hour on a single bike, bike sharing companies would need over 1,500 hours of bike riding to simply cover the cost of the bike, let alone cover labor, R&D, or make a profit. Assuming a bike is rented four times a day for two hours total, it would take more than two years to reach that target. These numbers make it difficult to justify the recent $450 million Series D funding round of Ofo from backers such as Lei
Jun (the founder of Xiaomi Corp.) and even Didi Chuxing. This round doubled the value of the company in just five months and is exemplary of the cash guzzling, but potentially lucrative business that is bike sharing.
which is given by the app, can be replaced with a personal lock or have their codes memorized. Bikes often get damaged, and significant manpower needs to go into finding and repairing these bikes.
Ofo’s chief rival, Mobike, has received upwards of $300 million in funding from investors such as Foxconn and Tencent Holdings Ltd. However, while the money can buy new bikes and improve the app, it is difficult to fix the fundamental flaws of the business. The ability to park a bike anywhere can lead to individuals hiding bikes, parking bikes in inconvenient or dangerous places, or even simply discarding bikes. The two main types of unlocking the bikes are also problematic. Mobike’s QR codes are often defaced, rendering them unreadable. Ofo’s mechanical bike locks, the code to
Luckily, investors are lining up for these companies, and popular trends are on the side of bike sharing. Biking is simply more efficient and cost effective for many people than cars or public transportation, and China has even officially praised Ofo and Mobike for working towards cutting emissions. This business model can thrive once the market becomes more defined, and can even expand into other developing countries that are in dire need of a solution to their increasing traffic nightmares.
MULESOFT IPO: MOST IMPORTANT TECH IPO OF 2017? Earlier this month, Snap Inc dominated headlines when it made its initial public offering. One of the hottest and most well-known tech startups had finally made it big, generating around $3.4 billion and attaining a valuation of $24 billion as of its initial pricing of $23.50 per share. However, a less hot but arguably more important IPO for the Valley and for the tech industry occurred just two weeks later March 17th. Beating Snap in the first-day trading comes the unicorn company that has consistently been ranked as a top performer in its industry. That’s right, the IPO that mattered in the month of March and biggest one in 2017 so far was that of MuleSoft.
Author Brandon Li Class of 2020 brali@wharton.upenn.edu
Founded in 2006, MuleSoft is a software company based in San Francisco that provides integration software for connecting data and applications. Its main product is its Anypoint Platform, which connects software as a service to onpremises software. Its customers include well-known companies such as McDonald’s, Salesforce.com, and Coca-Cola. With the growing importance for companies to operate in the digital space, APIs have acted as a driving force behind the connection between companies, partners, and customers and their future growth prospects. MuleSoft has aimed to be a major provider of integration software that connects any application, API, or data source. Since its inception, the company has received a total of $259 million in financing from early round investors such as Salesforce Ventures, New Enterprise Associates, and Lightspeed Venture Partners. At the end of its last valuation in May of 2015, the company was worth around $1.5 billion. What makes MuleSoft’s IPO so important and interesting is that its success has huge implications on the success of other mid-market enterprise cloud companies. In what seems to be a slowing down of IPOs in the past few years despite all-time highs in the U.S. stock market, the IPOs of Snap, MuleSoft, and other companies should lead to a burst of other IPOs. However, in 2016, MuleSoft lost $50 million in revenue, although that was an improvement over $65 million lost the year before. Although the company’s total revenue has also increased to $187.7 million in 2016 from 110.3 million in 2015, investors will continue to carefully monitor MuleSoft’s net income. If this trend continues, investors may view the long-term growth prospects of other companies in this space as lacking a big market and market opportunity. Furthermore, competition with well-established firms such as IBM, TibCo, and SnapLogic as well recent IPO announcements of close competitors will continue to test investors’ interest in MuleSoft.
However, on MuleSoft’s first day of trading, its shares “popped” more than 45 percent. They opened at $25.02 per share and closed at $24.75 per share, up from its expected range of $14 to $16. This pop in stock price essentially means that investors like the MuleSoft’s enterprise software offerings and that there is a healthy and high demand for its shares. After raising its $221 million with its IPO, MuleSoft now estimates its current market opportunity to be $29 billion. Ultimately, if Mulesoft continues to live up to its reputation for being one of the best and fastest growing integration software providers, then we could see many other unicorns following suit in the next few years. Exciting years might be just ahead for the enterprise software industry. Figure 1: Funding Rounds
SOFTBANK ACQUIRES FORTRESS INVESTMENT GROUP
Author Suyash Hodawadekar Class of 2018 suyh@wharton.upenn.edu
On February 14th, SoftBank announced that it would acquire Fortress Investment Group: a private equity giant with $70 billion in assets under management. The Japanese conglomerate agreed to buy the asset management company for $3.3 billion, representing a 39% premium above the closing price of the stock on the day prior. J.P Morgan and Morgan Stanley served as financial advisers for SoftBank and Fortress, respectively. Founded in 1998 with only $400 million assets under management, Fortress Investments Group is a key player in the private equity and hedge fund industry. By the time of Fortress’s initial public offering on the NYSE in 2007, the firm was managing $32.6 billion. Fortress’s private equity investment portfolio spans a broad range of industries including transportation, financials, healthcare, real estate, leisure, media & telecommunications, and energy. In 2002, Fortress launched its credit business, which is focused on investing in undervalued assets as well as distressed and illiquid credit investments globally. Fortress’s liquid markets business is focused on opportunities in the global currency, interest rate, and equity markets. Lastly, Logan Circle Partners is the company’s traditional asset management arm. The acquirer, SoftBank, is a Japanese technology giant that is ranked the 62nd largest publicly traded company in the world by Forbes. Headquartered in Tokyo, the conglomerate focuses on broadband, e-commerce, semiconductor design, and telecommunications to name a few. The company is well known in the U.S for its acquisition of struggling U.S.-based mobile phone carrier Sprint Nextel for $22 billion in 2013, with hopes of turning the company around. In addition, SoftBank was one of the earliest investors in Yahoo as well as Alibaba, both of which have been hugely successful for the conglomerate in the long term. In a sense, SoftBank has been run like a venture capital fund since the early 2000s. In October of 2016, the company announced that it would open a $100 billion fund to invest in technology companies globally. Saudi Arabia’s public investment fund agreed to contribute as much as $45 billion over the next five years in addition to other investors such as Apple, Qualcomm and Oracle’s founder Larry Ellison. The investment vehicle, named the SoftBank Vision Fund, is set to be almost 10 times bigger than the current largest technology fund on record. The $3.3 billion all cash acquisition of Fortress Investments Group is somewhat of a surprise for the SoftBank Vision Fund since the asset management company clearly cannot be categorized as a technology company. In addition, Fortress isn’t a huge player the TMT space, which is evident in its list of portfolio companies. Nevertheless, in terms of consideration paid, SoftBank seemed to purchase the company at a more than generous price. The 39% premium that SoftBank paid for Fortress values the company at a 9.8 times forward price-earnings ratio, which is on the lower end of the spectrum as depicted in the graph below. In addition, even though partners of Fortress, such as CEO and Randal A. Nardone, received substantial liquidity from the all-cash deal, they had agreed to allocate 50% of their after-tax proceeds in the new entity. This commitment shows a significant alignment of interests between Fortress and SoftBank investors moving forward.
From a macro-economic standpoint, the deal could spark a trend in privatization of publicly traded asset management firms. Due to the rise in popularity of ETFs, investors have been increasingly withdrawing their money from hedge funds and moving toward investment vehicles with lower fees. According to HFR Inc., the $3 trillion hedge-fund industry received approximately $70 billion in redemptions in 2016. Nevertheless, SoftBank
sees value in acquiring Fortress. Masayoshi Son, chairman and CEO of SoftBank, announced that Fortress will operate separately, but will assist in the management of the Vision Fund moving forward. Even if the company does not reap substantial synergies, SoftBank’s investment could be fairly successful since it acquired the company at such a low multiple.
Figure 2: Forward Price-Earnings Multiple for Listed Asset Managers
INVESTORS FLOCK AROUND GOOS Peter Lynch is known for his ideology: “Invest in what you know.” The growing number of Canada Goose coats spotted on the streets, the chaotic coat department in the Canada Goose section around Christmas time, and the $900 price tag failing to deter shoppers are all reasons Canada Goose may have caught investors’ attention. In an era where technology ventures are the main focus, noticing the quality, tangible, profitable Canada Goose product follows Lynch’s advice to “invest in what you know.” However, Canada Goose’s IPO is muddled with as much enthusiasm from investors as skepticism.
Author Colby Schofield Class of 2018 colbys@wharton.upenn.edu
In December of 2013, Bain Capital bought 70% of the company when it was valued at $250 million and the company is now worth $1.7 billion. On Thursday, March 16th, Bain Capital took Canada Goose (ticker: GOOS) public and in the first two days on the NYSE, the stock was trading well above its IPO price. In their F-1 registration statement, the company reported $291 million in sales ending in March, 2016 and $218 million in sales ending in March, 2015, which is a 34% growth rate. In 2014, the company also reached double-digit sales growth under Bain Capital’s ownership. Though Canada Goose was founded in 1957, it has only recently grown in vast popularity. Critics worry that GOOS shares will not take off. Some investors believe the popular brand is a “fad,” has slim growth potential, is a risky oneproduct company, is too costly to last, and its topline growth is not sustainable. Given that Canada Goose is a luxury brand and has limited target consumers, and the replacement cycle of coats can only last so long, it has little room for growth. Furthermore, PETA activists bought the minimum number of shares to take part in shareholder meetings and may also pose a threat to the stock. Financially, the stock isn’t cheap either. At 39x Adjusted Net Income (which is $0.44/share for the nine months ended December 31), investors are wary of the pricey stock. Additionally, in a pessimistic retail environment, there may be too much excitement around this one brand from desperate retail investors. The growth of Amazon and online retailers came along with a demise in brickand-mortar retail. The lower costs of online retail giants and consumers’ shift toward online shopping have been driving retail companies that have existed for decades out of business. The retail industry “is set to replace the troubled energy sector as the most distressed sector this year, according to ratings agencies, lawyers and analysts, beaten down by the strain of competition from juggernaut Amazon.com Inc. and a range of other issues.” (Garcia). The industry has been underperforming other indices and the slumping sales, decline in customer traffic, and decrease in store locations will likely lead to restructurings and bankruptcies for many retail companies. In lieu of a declining retail industry, Canada Goose presents a refreshing opportunity for investors. Similar to Peter’ Lynch’s advice, Warren Buffett once said “Never invest in a business you can’t understand.” Canada Goose’s clear business model, proven profitability, and visible growth is a positive sign for investors. Maja Rakic, a Bloomberg Intelligence analyst, wrote in a note on the day of GOOS’ IPO: “Plans to expand its direct-toconsumer channel should support superior growth. The company needs to make further investments soon, which could weigh on profit. Keeping tight
cost controls while driving sales will be key.� Dani Reiss (CEO) will need to continue to strengthen the brand as well as capture higher margins through their Direct to Consumer (DTC) channel. The Private Equity firm Bain Capital has already seen their investment grow sevenfold, however, there may be little payoff for new investors. As GOOS continues to trade on the market, investors should weigh these investment risks with these positive catalysts for the iconic emblem. It is yet to be determined whether the stock will continue to show gains or fly south.
ADVENT INTERNATIONAL MAKES OFFER FOR STADA
Author Michael Springer Class of 2020 msprin@sas.upenn.edu
As of February 23rd, Boston-based Advent International Corporation has submitted a legally binding offer to purchase all STADA Arzneimittel Aktiengesellschaft shares to the management team of the German pharmaceutical company. The offer price will be at 58 Euros per share, totaling the offer at close to 4 billion Euros. This offer is in response to London headquartered private equity firm Cinven Partners LLP’s indication that it may offer 3.5 billion Euros for Stada, or 56 Euros per share. Cinven’s offer caused STADA’s share price to hit an alltime high, jumping from around 47 to 57 dollars with news of the takeover offer. Advent has stated that they are convinced the offer “comes with high transaction security and is in the best interest of the company, its shareholders, and its employees,” which now forces the management team based in Bad Vilbel, Germany to decide whether to move forward with Advent’s offer. STADA is a pharmaceutical company which specializes in production of generic and over-the-counter drugs. According to their website, STADA is present in more than 30 countries with about 50 sales companies. Their branded products such as Grippostad, a leading cold medicine, and Ladival, a sunscreen brand, are top selling items in their product categories. STADA reported 2014 revenue of €2.06 billion, with a net income of €64.6 million. The offer comes at a time where STADA’s share price of $57.15, as of March 1st, is very close to its 52-week high of 58.01, largely due to recent takeover offers from Cinven and Advent that caused the share price to surge two weeks ago. Advent’s offer of 58 Euros per share places close to a 66 percent premium compared to the share price on March 31st, 2016, which was before the share purchases of activist investors were made public. The offer also implies a premium of around 26 percent when comparing the offer price to the calculated volume-weighted three-month average share price before Advent first approached STADA with an indicative proposal on February 1, 2017, according to the firm. Moving forward, Advent hopes the transaction will close after the dividend payment for the business year 2016. With this timing, investors would benefit from the expected dividend payment in addition to the bonus of the new cash offer price. Advent has previously held an active position in Germany and in the pharmaceutical sector, which has prepared the firm for another potential deal with a European pharmaceutical company. Advent has been active in Germany for over 25 years, and has completed more than 35 investments in the global pharmaceutical space. Advent’s history in the sector has spanned from pharmaceuticals (Viatris – formerly Asta Medica, Grupo Biotoscana, LKM, Terapia, Tropon) to pharmaceutical distribution (Mediq, Genoa) to pharmaceutical outsourcing in sales and clinical research (inVentiv Health). This experience will surely give Advent the operational expertise in developing STADA’s plan for sustained growth across product lines. Assuming Advent is able to close the deal with STADA around their expected response date, the firm hopes to boost STADA’s growth through investments in new productions, line extensions and acquisitions. The Boston firm claims they have no intention to sell off significant parts of the business or to split the company. Instead, Advent hopes to put in place a long-term strategy for STADA that focuses on developing new growth areas
and accelerating its international expansion. The focus of the growth will be placed in areas such as Germany, Italy, Spain, the UK, Belgium and Russia, which are all geographies where STADA already holds a leading position. Advent has also said they identify growth areas for the pharmaceutical company in Asia and Latin America. In order to assist in STADA fulfilling their growth trajectory, Advent can access additional capital for future acquisitions, while also utilizing the firm’s operational and sector expertise in order to support management in the execution of Advent’s proposed plan.
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