Kinnevik KINVB:SS
April 01, 2014 - 12:17pm EST by
ar971
2014 2015
Price: 240.00 EPS $0.00 $0.00
Shares Out. (in M): 245 P/E 0.0x 0.0x
Market Cap (in $M): 11,500 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Europe
  • Technology
  • Sweden
  • Holding Company
  • Potential IPO
 
* Idea not eligible for membership requirements

Description

 

Investment Kinnevik AB (KINVB:SS)

Recommendation: Buy

Market Cap: SEK 71,294mm (US$11.5bn)

Upside: 400SEK+

Downside: 230SEK


Executive Summary

Kinnevik is a Swedish holding company with core holdings in Millicom (38% of NAV), Tele2 (17% of NAV), Modern Times (6% of NAV), and other publicly listed holdings collectively representing 2/3’s of NAV.  For 10+ years, Kinnevik has been investing in technology-based businesses, which today represent the remaining ? of NAV. The Upside Case valuation for Kinnevik lies in the unlisted holdings valuation potential, especially Zalando.


Investment Structure Options

Millicom, Tele2, and Modern Times (depending on position size) are large/liquid enough to short, so any/all of those slices of the Kinnevik NAV can be hedged out to create “Kinnevik Unlisted” exposure, if desired.


This note will address the investment merit of Kinnevik based on the Zalando IPO alone. Later notes will address the investment merits of Kinnevik major holding stakes, aiding in the hedge/no hedge decision.


Catalyst

For many years, Kinnevik and the market have been very conservative in ascribing value to Kinnevik’s non-listed technology holdings, typically carrying them at investment cost or at 1-2x sales (both the market and the company in its publication of its NAV estimate).


However, the recent success of Zalando, now the largest European e-commerce company  is poised to change that perception.  Should Zalando, through an IPO process this spring/summer, achieve the same 3-5x sales multiple now enjoyed by publicly traded peers (such as Asos Plc), the revaluation of Zalando could raise the NAV of Kinnevik by 50-150SEK all by itself, a potential 55%+ return.


  • On Feb 14, 2014, the WSJ reported that Zalando’s owners have begun talking to Goldman, Morgan Stanley, and JP Morgan about a potential IPO of Zalando.

  • Recent communication with IR indicates that a Zalando IPO is likely a 4Q2014 or 1H2015 event.

  • Addition by Subtraction: Management is also looking at selling/spining/disposing all legacy assets (except MIllicom), which is another path towards unlocking the Zalando discount.










Background: Rocket Internet/Kinnevik Relationship


Rocket Internet, a German Internet VC company of which Kinnevik owns 24%, is the platform through which Kinnevik built its Internet holdings.



Background on Rocket Internet

Rocket Internet GmbH is a German online startup incubator founded in Berlin in 2007 by the Samwer brothers (Alex, Marc, and Olivier) who had made early fortunes founding Alando (a German version of Ebay) and Jamba!, which were sold to Ebay and Verisign for $50mm and $270mm, respectively. On the heels off those successes, they founded Rocket Internet in 2007.  The company's business model is to identify successful internet ventures from other countries (often the United States) and replicate them in predominantly emerging markets. To repeat, they do not attempt to innovate or invent business models - they copy successful business models (typically American ones).


  • Rocket Internet starts/launches companies and handles all the admin initially (hiring, design, marketing, etc.) and

  • Rocket lets the individual companies manage the business with best-practice input from Rocket Internet.

  • Rocket relies on superior execution and market understanding to succeed. This becomes very evident when comparing the different businesses: Zalando and Zalora (and all other Zalando clones) have almost identical websites, product ranges, shopping carts, etc.


In July 2013, Rocket Internet raised $400 million from an investor syndicate led by Russian billionaire Leonard Blavatnik, Swedish investment firm Kinnevik, and J.P. Morgan. This is in addition to over $1 billion that Rocket raised in 2012. Today, Kinnevik’s 24% stake makes them the principal investor in the group.  Rocket has 15,000 employees in 40 countries serving a global client base and has made over 75 investments. Kinnevik has the right of first refusal in Rocket’s investments and mainly has invested in Rocket’s transaction-based ventures.


Zalando represents the “crown jewel” of Rocket and Kinneviks technology-based investments thus far. In addition, however, Rocket Internet’s other ventures span the globe, with solid positions on every populated continent. The main investments groups are:

  • 35% of Bigfoot I (Dafiti, Lamoda, Jabong and partly Namshi)

  • 39% of Bigfoot II (The Iconic, Zalora, Zando and Jumia)

  • 26% of BigCommerce  (Lazada, Linio and partly Namshi)













Nearly all of these investments are in e-commerce, aligned with Rocket’s strengths and skill-set. Financial details are scarce, but none appear IPO-ready at this point.



Kinnevik reports the proportional part of revenues for its unlisted portfolio:

 

2012

       

2013

       

SEKm

Q1

Q2

Q3

Q4

FY

Q1

Q2

Q3

Q4

FY

Rev’s

797

1,1015

1,150

1,628

4,589

1,565

1,870

1,799

2,361

7,466

Q/Q %

25

27

13

42

 

-4

19

-4

31

 

Y/Y%

181

163

164

156

163

96

84

56

45

63

EBIT

-242

-356

-401

-283

-1282

-386

-326

-339

-181

-1149




































Kinnevik - Unlisted online investments as of Q4 2013

SEKm

Total Ownership (%)

Valuation Basis

(trailing sales)

Zalando

36

2x

Avito

31

13.5x

Bigfoot I

35

1.4x to 2.0x

 Dafiti

27

 

 Lamoda

28

 

 Jabong

26

 

 Namshi

14

 

Bigfoot II

39

1.4x to 1.6x

 Zalora

30

 

 The Iconic

30

 

 Zando

15

 

 Jumia

15

 

Home 24

22

 

Wimdu

29

 

BigCommerce

26

0.8x to 1.4x

Lazada

18

 

Linio

24

 

Namshi

10

 

Home24

33

1.2x

Westwing

23

1.3x

Wimdu

41

3.0x

Konga

46

 










Among the best ways to gauge the strength of these unlisted technology businesses is the recent success these co’s have had raising additional rounds of capital from the VC marketplace:


  • Dafiti: Online shopping in Brazil.

    • Raised $70mm from Ontario Teachers (sole investor in round). Brings total capital raised to $225mm to date.

    • Raised $10mm from Leon Group (Mexican Shoe consortium) earlier in 2013.

  • Lamoda: Online shopping in Russia.

    • Last round raised $130mm, June 2013 led by Access Industries (Blatvanik), Summit Partners, Tengelmann Ventures.

    • Previous round “between $40 and $80mm”, led by JP Morgan, Sept 2012.

  • Jabong: Online shopping in India.

    • Raised $100mm in Jan 2014, led by Rocket. Other investors include CDC. (Note e-commerce is nascent in India, at just 0.5% of total market).

  • Zalora: Online shopping in Southeast Asia (Singapore, Indonesia, Malaysia, Brunei, the Philippines, Thailand, Vietnam, Taiwan and Hong Kong).

    • Last round raised $100mm, June 2013, led by Rocket, including Summit Partners, Kinnevik, Verlininvest, Tengelmann Ventures.

    • Prior round: “significant $10+ mm” by JP Morgan, March 2012.

    • Prior round: $26mm by Tengelmann Ventures, March 2013.

  • Zando: Online shopping in South Africa.

  • Jumia: Online shopping in Africa.

    • $35mm from Millicom, June 2013

    • $26mm from Summit Partners, 2012 (Series A funding).

  • Linio: Online shopping in South America and Mexico.

    • Last round raised $50mm, November 2013.

  • Lazada: Online shopping in Southeast Asia (Indonesia, Malaysia, Thailand, Philippines, Vietnam).

    • Raised $130mm, June 2013 ($236mm total).

  • Namshi: Online shopping in MIddle East.




Rocket’s intentions for this portfolio is probably best summed up by this quote, taken from techcrunch.com:


“We have been building companies for the last 15 years in the internet space. We have long-term investors like JP Morgan and Summit and Kinnevik,” Rocket Internet co-founder Oliver Samwer told me in an interview at the time. “What they all share are two things: They are very long term oriented, and they are very international. They have a global perspective. The one benefit that we have is that we feel and think very much the same way they do. We start from scratch, and we have created sustainable companies, long-term investments where it is up to us to choose the route to liquidity.







Zalando – IPO Ready Value Driver


Zalando targets the European retail market (EUR $500bn+), where online currently only accounts for ~7% of total apparel spending. Kinnevik has invested in Zalando in several stages, bringing its stake to 38%, (29% directly and 9% via Rocket Internet), for which it paid SEK 5.6bn.  Zalando operates in 14 European markets: Germany, Austria, the Netherlands, France, Italy, the UK, Switzerland, Belgium, Sweden, Spain, Denmark, Finland, Norway and Poland. Roughly half of Zalando’s revenues are from shoes and half are from outside of Germany.


Asos Plc is the most comparable publicly traded company to Zalando, itself a pure-play e-commerce company with an emphasis on apparel. While ½ the size of Zalando on a sales basis, Asos is profitable with an estimated 2014 EBITDA margin of 14%, while Zalando, for whom detailed financials are not available, was reported by Kinnevik to have a -6% EBITDA in its annual update (Note that Zalando is EBIT breakeven in its core markets of Germany, Austria, and Switzerland). Heavy investments in proprietary logistics centers are likely impacting margins as well.  Kinnevik has referred to “ramp up costs” for Zalando in its reporting, but did not quantify these costs.  Since detailed financials are not available, it is impossible to know what if any accounting policies might be adversely affecting Zalando’s margins. Zalando’s upcoming IPO prospectus will likely shed more light.


Setting aside profitability measures of valuation for now, note that Asos Plc trades at 5x and 4x 2014E and 2015E revenues, respectively. The table includes revenue projections for both Zalando and Asos, as well the projected valuation per Kinnevik share of Zalando only at 3x and 4x Revenues per share valuations.
























Zalando Revenue Projections, Euro’s (Source: Goldman)

 

2014E

2015E

Zalando Revenues

2,500

3,400

y/y %

 

36%

Asos Revenues

1,200

1,560

y/ %

 

30%

Kinnevik Stake

36%

36%

Zalando EV (SEKmm) @ 3x Rev’s

66,675

90,678

Zalando EV (SEKmm) @ 4x Rev’s

88,900

120,904

Zalando @3x Rev’s/share

102SEK

139SEK

Zalando @4x Rev’s/share

136SEK

185SEK

Zalando / Kinnevik share - Current Valuation

51SEK

51SEK

Kinneivik recent NAV

245SEK

245SEK

Kinnevik NAV Increase % from Zalando IPO

   

Zalando @3x Rev’s/share

21%

36%

Zalando @4x Rev’s/share

35%

55%



The table above shows the potential value per Kinnevik share of ZALANDO only assuming Zalando is able to achieve an EV/Sales on par with Asos.


Zalando accounts for 51 SEK/share of Kinnevik today, at Kinneviks conservative 2x trailing sales valuation.













KINNEVIK NAV MODEL

HOLDING

% STAKE

Market Value

(mm, SEK)

% NAV

     

LISTED

           

Millicom

37.2

25,700

38%

     

Tele2 (a)

30.5

11,100

17%

     

Modern Times (a)

12.4

4,100

6%

     

CDON

24.8

680

1%

     

All Others (b)

 

1,000

       

Total Listed

 

42,800

       
             

UNLISTED

 

Reported Value (mm,SEK)

       

Zalando

36.0

12,100

18%

     

Bigfoot 1

35.0

1,700

3%

     

Avito

31.0

2,200

3%

     

Metro

100.0

1,100

2%

     

Other Rocket

NA

1,500

2%

     

Home24

35.0

690

1%

     

Bigfoot 2

40.0

435

1%

     

BigCommerce

27.0

550

1%

     

Wimdu

34.0

390

1%

     

Others

 

1,964

3%

     

Total Unlisted

 

22,700

       
             

Cash

 

5,200

8%

     

Total Debt

 

(3,225)

(3%)

     

Pension

 

(29)

0%

     

Treasury Sh’s

 

875

1%

     

NAV

 

68,300

       

per share:

 

246

       

Notes to NAV Model

(a) Includes A & B shares.

(b) Includes holdings in: BillerudKorsnas AB, Black Earth Farming, CDON Group, Transcom Worldwide, Seamless Distribributors.


Note that the Unlisted Holdings valuations employ a highly conservative 1-2x sales or cost-basis valuation method, on a case-by-case basis.


Next Steps/Open Issues:


  • Kinnevik is in a quiet period as the Zalando IPO is prepared (not that information flowed freely before the IPO “leak”. The 2013 Annual report was the first time any metric of Zalando’s profitabilty was shared, and to-date only annual sales growth data has been available).

  • Kinnevik’s CEO Mia Brunell Livfors announced in January 2014 she is stepping down after 20 years with the company. She is staying on till a replacement is found.

  • March 14, 2014 - Kinnevik invests $90mm in Quikr, an Indian Online and mobile Classified Ad’s company, makes its 2nd (confirm) technology investment outside of Rocket Internet. Other investors included: eBay, Omidyar Network, venture capital firms Matrix Partners India, Nokia Growth Partners and Norwest Venture Partners.




























I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

 IPO of Zalando
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