BERLIN — Maybe it’s too much of a good thing.
German e-tail giant Zalando saw its debut on the Frankfurt Stock Exchange fizzle on Wednesday, as shares closed at exactly the same level as the initial issue price. While demand for shares was high, the problem may be that the e-tailer’s initial public offering comes amid a string of Internet IPOs, beginning with the blockbuster one in New York by Alibaba and including another one today in Germany by Zalando’s initial incubator, Rocket Internet.
Other e-tech IPOs coming up in Germany in 2014 include Internet service providers Line, Mega and Box and search engine Scout24.
In Germany’s largest initial public offering in more than a decade, Zalando shares opened at 24.10 euros, or $30.37 at current exchange, 10.8 percent over the initial issue price of 21.50 euros, or $27.20. The day’s high was 24.45 euros, or $30.93, but at 5:30 p.m. Central European Time, Zalando ended its first day’s trading exactly at the issue price of 21.50 euros on the electronic trading platform Xetra.
Close to 16 million units changed hands on Wednesday on Xetra and the floor of the Frankfurt exchange.
The market was expecting a stronger reception, and, in the days leading up to the IPO, Zalando executives said demand was so high, they could have sold 280 million shares, or 10 times more than they wanted, at the highest end of their book-building range of 18 euros to 22.50 euros, or $22.77 to $28.46.
On Monday, Zalando set the initial price near the top end but not at the top of its range, reportedly concerned that too high a price in a possibly overheated technology-shares market could do away with any first-day-trading pop. That pop didn’t materialize.
“I’m surprised, actually,” said one analyst familiar with the Berlin based e-tail giant, which has become Europe’s largest specialist fashion and footwear e-tailer since going online in fall 2008. In the first half of 2014, Zalando generated sales of 1.05 billion euros, or $1.44 billion, and posted its first operating profit in the second quarter of 2014.
Dollar figures are converted at average exchange for the period to which they refer.
“It’s difficult to say why [reception was so flat]. If you look at the value of the company, it’s still attractive, and if you look at earnings going into next year, it’s attractive still,” continued the analyst, who requested anonymity. He suggested Wednesday’s stock performance could just be a beginner’s blip that would stabilize in the next few days and added that, in his view, Zalando’s shares are “still an attractive investment, especially now as the price is low.”
Commenting on Zalando’s current positioning, Hana Ben-Shabat, partner in the retail practice of global management consultant A.T. Kearney, noted, “Zalando has checked the box as it pertains to the growth of e-commerce and the fact that apparel e-commerce penetration is at all times high, given its up to 17 percent expansion in some markets. Moreover, there are many small European brands that can’t afford to build e-commerce operations, so Zalando is a great route to market, shortcutting the need to invest in that capability.”
Considering the factors behind Zalando’s somewhat disappointing public outing, she said, “The Zalando value proposition is not so clear to me. They don’t have the fashion-forward orientation that Asos, for example, has or the strong service mantra that comes with Zappos. As such, they are a selling platform that, in some countries, will be soon competing with Amazon. Considering Amazon’s scale, that’s hard.
“So, long term, they have to be clear about their value proposition and also how they prioritize the countries they enter, so they can build some scale and profitability,” she said.
For Zalando, the issue volume of 24.5 million shares has brought in 605 million euros, or $765.4 million, at the issue price. This values the six-year-old Berlin-based firm at 5.3 billion euros, or $6.71 billion, a good enough reason to “Scream for Joy,” or “Schrei für Gluck,” as Zalando’s well-known advertising goes. Indeed, those on the floor of the Frankfurt exchange heard a signature scream over the loudspeakers as trading began at 9 a.m.
The e-tailer, which currently offers more than 150,000 products from more than 1,500 brands in 15 European markets, said it intends to use the funds for investments in the technology sector, such as the photo-search function currently being tested on its German iOS app. Neither acquisitions and mergers nor market entries outside of its current European playing field are on the immediate horizon, executives stated.
Zalando has now floated about 11.3 percent of the company. The remaining stakes are in the hands of its existing major shareholders, which include Swedish financial investor Kinnevik, Anders Holch Povlsen, DST Global, Holtzbrinck Ventures, Tengelmann Ventures and the Samwer brothers of Rocket Internet.
Rocket, the incubator that launched and funded Zalando, is poised to overtake its offspring as Germany’s biggest IPO not only this year but ever, when trading begins in Frankfurt today. The Berlin-based company is set to raise up to 1.6 billion euros, or $2.02 billion, with an issue volume of 37.88 million shares in a book-building price range of 35.50 to 42.50 euros, or $44.91 to $53.77. This would value the self-described “company builder” at up to 6.7 billion euros, or $8.48 billion. Aiming to “become the world’s largest Internet platform outside the U.S. and China,” Rocket reportedly needed only 90 minutes on its road show to fill the books. The interest, said an observer, “is extremely high.”
Overall, demand for e-commerce stocks is on the rise in Germany, with Alibaba’s high-stepping debut adding fuel to the fire.