Bloomberg News

Groupon Value Propped Up With Lowest Internet Float in Decade

November 08, 2011

Oct. 28 (Bloomberg) -- Groupon Inc. is selling fewer shares in its initial public offering than any U.S. Internet company in the past decade, creating a higher valuation than some investors say the online-coupon provider deserves.

The Chicago-based company is offering 4.7 percent of its stock, less than any U.S. Internet-company IPO of more $200 million since at least 2000, according to data compiled by Bloomberg. Google Inc. sold a 7.2 percent stake in its 2004 IPO. LinkedIn Corp. offered 8.3 percent of its shares in May.

“What Groupon is doing is way outside what should be acceptable,” said Josef Schuster, founder of Chicago-based IPOX Schuster LLC, who oversees $2.5 billion and is weighing whether to order the stock. “They’re using a low float to keep up the valuation, but it’s really outside what you historically have had in U.S. IPOs.”

Groupon is seeking to raise as much as $540 million, making the unprofitable company more expensive than Amazon.com Inc. and Microsoft Corp. relative to 2012 sales estimates. The small offering size also leaves the shares more vulnerable to large price swings and carries the risk of greater dilution when founders and venture-capital backers sell stock.

Pandora Media Inc., the online radio service that sold 9.2 percent of its shares in an IPO in June, jumped 8.9 percent on its trading debut, only to slump 24 percent the following day. The shares now trade 7.4 percent below the offering price.

‘Juice the Price’

In a typical IPO, investors receive shares worth 20 percent to 25 percent of the company, according to Paul Deninger, a senior managing director at investment bank Evercore Partners Inc. in San Francisco who isn’t involved in the Groupon sale.

“The small float in attempt to juice the price is a concern,” said Wayne Wilbanks, chief investment officer at Wilbanks, Smith & Thomas in Norfolk, Virginia, which manages about $1.8 billion. “It’s a double-whammy: a combination of excessive valuation and a small float.”

Julie Mossler, a spokeswoman for Groupon, declined to comment on the company’s stock offering.

The company is meeting investors this week to pitch the IPO, which is scheduled to price on Nov. 3. If demand is greater than expected, Groupon could increase the number of shares offered or raise the price. LinkedIn boosted the top end of its range by 29 percent. Those shares jumped 109 percent on their first day of trading and are still trading at almost double the IPO offer price.

Zynga’s Float

“I had a lot of concerns about LinkedIn, but I have even more concerns about this particular model and the sustainability,” Wilbanks said about Groupon.

Groupon is seeking a valuation of about 5 times projected 2012 sales of about $2.1 billion, people familiar with the plans said earlier this week. That’s more expensive than Amazon.com, the world’s largest online retailer, which trades at about 1.5 times estimated 2012 revenue. Microsoft, the biggest software maker, is also cheaper, trading at 2.9 times projected revenue.

Other companies are also pursuing low-float strategies. Zynga Inc., the top developer of games for Facebook Inc.’s site, is planning a float smaller than 10 percent, a person with knowledge of the matter said in June. That offering is scheduled to be completed before the Nov. 24 Thanksgiving holiday, people familiar with the process said this week.

Groupon would probably have struggled to get the same valuation attempting to raise funds from venture capitalists, said IPOX’s Schuster. The IPO terms value the company at as much as $11.4 billion. Groupon had discussed a valuation of $25 billion with bankers in March, people with direct knowledge of the matter said at the time.

VC Valuation

“No VC is going to value the company like that right now,” said Schuster. “Why don’t they just go to a VC firm? They don’t go there because they can’t sell it. The stock market is a means for them to do that.”

Groupon’s last round of financing in January valued the company at about $4.75 billion, people with knowledge of the matter said at the time.

New Enterprise Associates, Groupon’s earliest venture capital investor, owns 14 percent, and Accel Partners has 5.2 percent. Groupon Chairman and co-founder Eric Lefkofsky is the biggest shareholder, with 20 percent of the common stock, the IPO prospectus shows. Co-founder and Chief Executive Officer Andrew Mason owns 7.4 percent.

Keirsten Lampkin, a spokeswoman for Accel Partners, declined to comment. A spokeswoman for NEA didn’t respond to a request for comment made after regular business hours.

Existing shareholders are restricted by a so-called lockup period from selling their stock until at least 180 days after the offering, according to the prospectus. All of the shares in the IPO are being sold by Groupon.

Morgan Stanley, Goldman Sachs Group Inc. and Credit Suisse Group AG are leading Groupon’s offering. The stock will trade on the Nasdaq Stock Market under the symbol GRPN.

--With assistance from Ari Levy and Douglas MacMillan in San Francisco and Xu Wang in New York. Editors: Jennifer Sondag, Katherine Snyder

To contact the reporter on this story: Lee Spears in New York at lspears3@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net


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