German online retailer windeln.de had planned a comfortable and snug initial public offering this year to fund its growth and allow existing shareholders, including affiliates of Goldman Sachs and Deutsche Bank, to sell shares.
But shares of the company, whose name is German for “diapers,” fell as low as €16.33 after listing on the Frankfurt Stock Exchange on Wednesday. The stock was down 9 percent by 10:07 GMT at €16.80 compared with an issue price of €18.50. Based on the latest stock price, Windeln's market value was around €437 million, while it was worth €470 million based on the issue price.
Windeln sold €100 million worth of new shares, while existing shareholders sold another €84 million worth of stock. The shares sold at the mid-point of an initial issue price range between €16.50 and €20.50 a piece.
Windeln allows parents to shop for their baby and toddler products without leaving the house. Founded in 2010, its sales more than doubled in 2014 year-on-year, reaching €101.3 million, or $110.7 million.
The company's marketing model is seen as cost-effective and targeted: Windeln uses information from customers' orders to determine what age their kids are and thus only promote age-appropriate products to the parents.
Windeln also has a very loyal customer base. More than 80 percent of them are repeat customers, and often increase the value of what they order. Compared to online fashion retailers that struggle with as much as 50 percent return deliveries, Windeln has a return rate of only 5.7 percent.
However, the market newcomer is not profitable yet. Last year, earnings before interest and taxes were €11.7 million in the red on sales of €101.3 million. The operating cash flow was most recently at minus €6 million. While it is still burning up millions of euros, the company is betting on rapid growth – and that costs money.
Including the capital increase and cash, the fair market value could be a bit over €374 million.
Windeln has accrued losses of around €34.5 million since it was founded. Investors, including Goldman Sachs and Germany’s largest bank Deutsche Bank, have financed it with fresh equity. The two banks have also managed the sale of the shares, together with BofA Merrill Lynch, Berenberg and Commerzbank.
The online shop, windeln.de, which accounts for 88 percent of company revenues, is already profitable, but subsidiaries are making losses, for example, the windelbar.de website, where leftover stock is sold and which contributes 9 percent of total revenue.
The baby-products supplier is expected to yield a profit in 2017 at the earliest. In order to finance growth, Windeln wanted to raise money on the German stock market.
The market value of €470 million based on the issue price is quite ambitious. The company was not valued until the end of 2013. The result was that a year and a half ago, the company was worth €95 million.
The company's chief financial officer, Nikolaus Weinberger, tried to explain the sharply increased value. “The bigger e-commerce companies get, the more profitable they become. That is why their value quickly goes up,” Mr. Weinberger said. He joined the company from investment bank Goldman Sachs at the beginning of April, where he had been project manager for the Windeln IPO.
In his new position, Mr. Weinberger sees opportunity in purchasing small firms with revenues of €10 to €20 million. In terms of turnover, Windeln pays significantly less for them than analysts value Windeln itself at.
The scale effects are considerable, Mr. Weinberger said. With increasing size, for example, one gets “better purchasing conditions.” And no matter how much revenue an Internet company generates, it needs around the same number of employees for IT, finance or purchasing of goods, he said.
Windeln now wants to focus on Poland and Italy for its expansion plans. Alexander Brand, co-founder and co-CEO, is betting on rapid growth. “I think it makes sense to secure large market shares as quickly as possible. If the market offers the opportunity for rapid growth, we see this as an added benefit,” said the 43-year-old.
The market newcomer will not be able to increase its revenue by 100 percent this year. The higher the turnover, the weaker the percentage growth. Acquisitions speed things up. Windeln has recently bought the Czech company Feedo, an online shop for baby and toddler products, which is also active in Slovakia and Poland and had revenues of around €6 million in 2014. The purchase price is expected to be €11 million, plus an additional sum which is dependent on how the revenue pans out by 2017.
But Germany also offers growth opportunities. Last year, the diaper delivery company estimated the local market for products for children up to six years old to be worth €8.4 billion.
It is conceivable that the company itself could become a takeover target. Analysts estimate that windeln.de and Amazon together sell more than half of all Procter & Gamble Pampers sold online. It is quite possible that a producer could pounce.
That approach also has disadvantages. The more strongly the company grows, the less profitable it is because it has to finance the growth. So Windeln will not be a dividend-paying stock for the time being.
It makes sense to secure large market shares as quickly as possible. If the market offers the opportunity for rapid growth, we see this as an added benefit. Alexander Brand, co-founder and co-CEO, windeln.de
At the same time, online competition will grow. German drugstore chain Rossmann already has its own online shop, and German competitor DM will launch one in the early summer and offer baby products as well.
Windeln has grown massively in China, where it made more than half of its revenue last year. At the end of 2014, it had 146,000 active customers in China of a total 496,000 registered customers. After scandals surrounding contaminated baby formula and sick children, Chinese mothers are now opting for European products.
Shareholders can only hope that the Chinese government does not intensify the regulations for these kinds of private imports. “The Chinese authorities significantly eased customs regulations years ago for Chinese people who purchase small amounts of things for personal use abroad,” said Mr. Brand. For that reason, he also sees growth opportunities in China. “Given the around 17 million births in 2014, we still see a lot of potential there,” he said.
In addition to affiliates of Goldman Sachs and Deutsche Bank, some other big shareholders are selling shares. They include growth financing provider DN Capital and Acton Capital, who own about 14.4 and 11.5 percent of Windeln after the listing and excluding an option to sell additional shares.
Most of the old shareholders are not allowed to sell their shares until 180 days after the first trading day. After that, if the market valuation is reasonable, some of them could cash in and the price could fall.
So investors do not necessarily need to subscribe right at the issuance. They can wait to see how the company debut on the market goes. The share prices of listed online companies often fluctuate heavily so that there could be a better opportunity to enter into the promising business model.
If an option to sell extra shares is fully exercised, Windeln and its shareholders will raise another €11 million, bringing the total IPO volume to €211 million and the market value at the issue price to €497 million.
This article first appeared in the business weekly WirtschaftsWoche. Gilbert Kreijger, an editor with Handelsblatt Global Edition in Berlin, contributed to this article. To contact the author: [email protected].