Fashion Flotation

At German Online Retailer Zalando, a Record IPO Takes Shape

A Zalando logistics center in Germany. Source: Zalando
A Zalando logistics center in Germany.
  • Why it matters

    Why it matters

    Zalando’s IPO performance is the first big test of Berlin’s start up scene. If it succeeds, it could pave the way for other online retailers to go public.

  • Facts

    Facts

    • Zalando is Europe’s largest shoe and fashion online retailer.
    • Zalando is an investment by Rocket Internet, a Berlin start-up incubator planning its own IPO.
    • Zalando wants to sell shares before the Chinese Internet online giant Alibaba launches its own IPO.
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    Audio

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German online fashion retailer Zalando on Wednesday announced plans to raise hundreds of millions of euros in Europe’s largest initial public offering since the collapse of the dot.com bubble nearly 15 years ago, in a test of the financial viability of Berlin’s start-up scene.

Analysts suggest that a successful launch could herald a new era of IPOs by online companies. The size of the IPO was clouded in speculation and the company, based in Berlin, declined to comment other than to say that the money raised would equate to 10 to 11 percent of its total market value.

According to people informed of the company’s plans who spoke with Handelsblatt, Zalando plans to raise up to €750 million ($985 million), which if correct would value the company at more than €7 billion. A frequently used estimate of the market value of Zalando, a retailer that has grown quickly by giving its customers free postal exchanges on all of its merchandise, was €4 billion.

Regardless of the ultimate size of the deal, analysts said it could set a precedent, ushering in a new era of IPOs in Germany after the collapse of the dot.com economy in 2000.

“If the Zalando IPO is going to be a success, it will be an indicator to other online retailers and tech companies to go public as well,” Bjorn Gustafsson, an analyst at Kepler Cheuvreux, said.

Zalando, which sells shoes, clothes and accessories, was founded in 2008 by David Schneider and Robert Gentz. It was backed by three German brothers — Oliver, Marc and Alexander Samwer — who founded an Internet start-up incubator called Rocket Internet. Both companies are based in Berlin and have been viewed as the symbols of the German capital’s growing e-commerce scene.

There has been speculation that Rocket Internet is itself preparing for an IPO, but the company and its founders have declined to comment publicly. If that is true, the success of Zalando’s IPO will be a significant test of whether Rocket Internet will follow with its own flotation.

The Zalando public listing has the backing of some of the world’s largest investment banks including J.P. Morgan, Goldman Sachs, Credit Suisse, Deutsche Bank and Morgan Stanley.

“I think the market will react very positively for two reasons. Firstly, Zalando announced this IPO a long time ago. This was a good tactic to prepare investors. Secondly, the company is in the black,” said Konrad Bösl, chief executive at the corporate finance advisory Blöttchen & Partner in Munich.

Zalando has seen break-neck growth since university classmates Mr. Schneider and Mr. Gentz began the company as an online shoe store in 2008.

It started off as an online shoe retailer but has since started selling clothing across Europe.

Zalando operates in 15 countries across Europe.

Sales are about €1.8 billion a year, up from just €6 million in 2009.

The company earned €12 million in the first six months of 2014, the first time they made a profit for the group. But the company has said it has long been profitable in its core markets of Germany, Austria and Switzerland. Zalando recently announced plans to scale back its international expansion to improve distribution, logistics, and customer experiences.

According to a Zalando statement, the company plans on raising 10 to 11 percent in a capital increase.

Zalando declined to comment on how much money it expected to be made. The uncertainty goes to a core issue surrounding the retailer: its current market value. The company would only say that its IPO would take place in the second half of this year.

“We’ve never commented on any kind of speculation regarding valuation,” a Zalando spokesperson, Boris Radke, told Handelsblatt Global Edition.

 

One analyst said Zalando’s IPO is likely to succeed. “It is good timing,” said Wolfgang Jung, a board member of Südwestbank, a regional bank in the southwestern state of Baden-Wuertemberg, told Handelsblatt Global Edition.

Zalando shareholder Kinnevik, a Swedish private equity firm, holds a 36 percent in the retailer, and the Samwer brothers have 17 percent through a company called Global Founders.

In its annual statement at the end of 2013, Kinnevik said its stake was worth the equivalent of €1.3 billion, which would make the total value of the company €3.7 billion.

A Danish fashion executive, Anders Holch Povlsen, has 10 percent, a venture capital firm called DST Europe, which previously invested in Facebook and Twitter, has 10 percent.

Mr. Gustafsson, the financial analyst who is based in Stockholm, said he spoke to Kinnevik this morning. Kinnevik and the other shareholders, Mr. Gustafsson said, plan to maintain their stakes following the IPO.

While announcing plans for its IPO, Zalando also said it had agreed on a €200 million credit line in July with Morgan Stanley, Goldman Sachs, Credit Suisse, Deutsche Bank and J.P. Morgan. These are the same banks that have prime responsibility to sell the shares. Mr. Radke, the Zalando spokesman, said the credit line was not a condition for the banks to agree to handle Zalando’s IPO.

 

Zalando bosses David Schneider, Rubin Ritter, Robert Gentz (l-r). Source: Reuters
Zalando bosses David Schneider, Rubin Ritter, Robert Gentz (l-r). Source: Reuters

 

“They are standalone decisions which would have been taken regardless,” Mr. Radke said.

Investors are closely following other IPOs such as Alibaba, the Chinese online retailing giant.

With its announcement today, Zalando appeared keen to get a jump on Alibaba, which had postponed its own IPO plans until the end of the summer, when U.S. traders return from vacation.

But there is some worry about Zalando’s timing.

A glut of disappointing trading results from online retailers have made some investors wary. Amazon.com reported weak second-quarter results in July, and British online retailer Asos reported two profit warnings this year. The first came just a few weeks after shares reached their highest level since the company floated in 2001.

Zalando’ s biggest question may be the significance of the company’s liberal returns policy, which guarantees free return shipping of any goods, on its business success.

About half of the goods it sells are returned.

Zalando ran an experiment in Germany, making returns more costly and less automatic for some customers, and said it noticed that customers simply spent less. The company’s founder, Rubin Ritter, told reporters at a presentation last week that generous returns policies were something that online retailers “have to live with,” as customers expect them.

“If you have a 50 percent rate of returns (such as Zalando), and you decrease this by 1 percent, this has an enormous effect on a company’s profits,” said Christian Schulze, assistant professor for marketing at the Frankfurt School of Finance.

“Sending back items for free and without good reason is a risk factor,” Mr. Bösl, the German financial adviser, said.

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