Comment: UK IPO Is Blast from Dot-Com Bubble Past


The residents of upscale South West London just "lurve" to shop in supermarket Waitrose and its online delivery version Ocado. Like Whole Foods Market, it's a badge of middle-class prosperity, which, along with the SUV and the kids at private school, point to non-cyclical wealth.

"Recession? What recession?" could be the war cry from the clientele.

The problem is that when the founders of Ocado and their bankers priced its initial public offering Wednesday, they forgot that it's not the image-conscious shoppers doing the buying, but the hard-pressed investment community who have been living on ration packs rather than organic pheasant for the past two years.

Ocado has never made a pre-tax profit, yet still priced its IPO at a valuation of nearly $1.5 billion for the company. The company was forced to lower its expected range after one that valued the company at as much as $2 billion.

In the good old days, companies coming to the market could ask for outrageous valuation premiums and the market would queue up dutifully and pay what it was told to by the City and Wall Street advisors who licked their lips at the fat fees earned from the conveyor belt.

Ocado may have been banking on some in the market forgetting the lessons of the late '90s and debacles like That online retailer was founded in 1998 and it raised $82.5 million in an IPO early in 2000, only to close down its operations towards the end of that year.

Ocado's IPO broke at the start of trading, falling below its 180 pence per share pricing. Shares of Ocado traded around 161 pence in mid-morning trading.

Ocado's online grocery model has gone from strength to strength since the company was founded by three former Goldman Sachs bankers 10 years ago. But some analysts believe the market is being asked to pay up to 40 times earnings for the stock. A tad rich in these straightened times.

And the price movement Wednesday was not a great advertisement for the health of the IPO pipeline.

On the other hand, the fact that Ocado even got the float away despite big valuation questions will be seen as a minor victory in some quarters.

Let us not forget that UK names such as retailer New Look, theme park-operator Merlin Entertainments and airline-ticketing group Travelport all pulled IPOs at the last minute after the City balked at prices asked.

So while the private equity houses - and other sellers lining up to offload assets such as Ocado - are having to work just that little bit harder and offer even sweeter prices to entice buyers, this is good news for the other side of the trade who now have a chance of getting price discovery before their holdings are loss-making on day one of the IPO.