Rocket Internet The Fall of Icarus

No plan, no profits, no new ideas. Oliver Samwer’s startup factory is stuck in a rut. Can flagship projects like Delivery Hero and Hello Fresh finally turn things around? Confidential papers raise doubts.
Oliver Samwers, once dubbed "the German Mark Zuckerberg".

In October 2014, Oliver Samwer was riding high. His online conglomerate Rocket Internet was about to launch on the stock market, ambitious to become the leading internet corporation outside the US and China. He was determined to turn his enterprise into one of the biggest “made in Germany” success stories of all time. “In 40 years you will read on Wikipedia that nobody in the world has systematically created so many internet businesses as we did,” Mr. Samwer predicted on the day of initial public offerings.

But the bold claims fell flat. On its first day as a listed company, Rocket Internet’s stock price kept falling, and investors got a taste of what was to come over the next two and a half years. Since its stock exchange debut, the group’s flops have piled up and shares have lost 60 per cent of their initial value. During the last nine months of 2016, losses amounted to €642 million.

Then in February, Swedish investment firm Kinnevik significantly reduced its share, and Rockets Internet’s stock hit a new low.

Kinnevik was one of Rocket Internet’s most trusted investors. The two companies had jointly invested in the online fashion retailer Zalando, reaping healthy profits. But other products, like Westwing, Home24 and Jumia, didn’t see the expected growth under Mr. Samwer’s aegis. Investors were disenchanted.

Losing its Swedish partner was a serious setback for Rocket. It came just as Mr. Samwer was planning to restore his company’s image through two startups: meal kit company Hello Fresh and takeaway delivery portal Delivery Hero.

 

Without Foodpanda, Delivery Hero would have made profits both in 2016 and 2017.

Listing the two daughter companies would be a coup for the entrepreneur. But documents obtained by WirtschaftsWoche reveal both are making substantial losses and paying very high interest rates. Neither delivery business looks ripe for the stock market. And there is a feeling in financial circles that it’s high time Mr. Samwer delivered, especially after he “burned so much cash,” as one founder from Berlin put it.

Mr. Samwer, whom Handelsblatt once called “the German Zuckerberg,” is now increasingly reliant on Delivery Hero’s co-founder and chief executive Niklas Östberg. Yet in a recent interview with Manager Magazin, Mr. Östberg claimed that if the company was floated on the stock market, its value wouldn't go beyond the last big financing round in 2015. It’s reasonable to assume these predictions are based less on modesty than Mr. Östberg’s assumption that a higher share price might not attract investors.

Delivery Hero operates in over 40 countries and is known in Germany under brands like Lieferheld or Pizza.de. Last year, it delivered 178 million meals at an average price of €14 per order. Two years ago, Mr. Samwer was looking to get rid of his 40 percent share in Delivery Hero and his 52 percent of delivery website Foodpanda. But last year he changed tack and ceded his 49 per cent share of Foodpanda to Mr. Östberg in exchange for Delivery Hero stocks.

According to Mr. Östberg, the platform has huge potential for growth. Rocket Internet’s chief financial officer argued that “the transfer of Foodpanda to Delivery Hero would strengthen the latter’s international market position of and create synergies.”

Documents acquired by WirtschaftsWoche suggest another, at least as pressing, reason for the transfer. They show that during the third quarter of 2016 Delivery Hero’s cash reserves had almost dried up. So much so that the company borrowed €55 million at double-digit interest rates from “Apollo” – a codename for Rocket, according to insiders.

Foodpanda, meanwhile, had sold a Russian subsidiary, freeing up €139 million that relieved Delivery Hero’s liquidity problems in the short term. Foodpanda brings in barely a fifth Delivery Hero’s yearly turnover, but with interest rates, taxes and write-downs makes almost as much of a loss.

In 2016 Delivery Hero and Foodpanda together registered losses of €117 million (EBITDA). Similar results are expected for the current year. These are sobering numbers. In fact, figures show that without Foodpanda, Delivery Hero would have made profits both in 2016 and 2017.

Delivery Hero’s managers put Foodpanda’s disappointing performance down to the fact the platform is mostly active in emerging economies, which “implies a negative EBITDA in many of its markets but also a particularly high potential for growth.” Still, investors might think twice before putting their money into a project that currently burns millions.

Competitors Amazon Restaurants and UberEats have virtually unlimited cash reserves and could take over the entire food delivery market.

Delivery Hero plans to reverse negative figures by employing its existing workforce to cover Berlin-based positions at Foodpanda, mainly in IT, saving some €6 million euros annually. Yet many investors do not share Mr. Östberg’s optimism about Lieferheld and Pizza.de remaining market leaders in Germany “with healthy growth rate and sound profits.”

They are concerned about the success of competitors like Lieferando, to which the Delivery Hero-Foodpanda project is losing market ground. But the biggest threat seems to be from powerful competitors like Amazon Restaurants and UberEats. The two industry giants have virtually unlimited cash reserves and could take over the entire food delivery market.

Kinnevik’s sale of Delivery Hero shares was the straw that broke investor’s confidence in Mr. Samwer’s group. The move has been interpreted as a lack of faith in Delivery Hero’s chances of pulling off a successful stock market debut. But Mr. Östberg played down the Swedes’ decision, saying Kinnevik had no access to the company’s books. “The decision was not based on our accounts,” he insisted.

Yet much uncertainty lingers over Delivery Hero, and that its management failed to release a reassuring statement about the situation only made things worse. It might have been wise to present the move as jointly planned. Instead, Rocket just said, “We are making progress and we will stick to our goals.”

Delivery Hero will have to wait for its entry to the stock market. For Mr. Östberg, this means finding a liquidity cushion. That might come from the recent sale of a British subsidiary. Should the antitrust authorities agree to it, the sale could put €240 million in Delivery Hero’s coffers. That would help the group meet its €75-million repayment obligations to Apollo and make it through the end of 2018.

If Delivery Hero’s financial prospects do not improve after 2018, the Rocket group might consider bringing Hello Fresh to the stock market. Mr. Samwer is the majority shareholder, with 53 percent. The platform generated revenue of €438 million of in the first nine months of 2016 – more than double that of the previous year.

Rocket Internet - Oliver Samwer's Big Bets-01

Yet such success comes at a price – marketing campaigns siphoned off 28 per cent of revenue in 2016. The advertising budget is to be cut to 18 percent by 2018, raising the question of whether it can keep up the momentum growth.

At the last round of financing in December 2016, Hello Fresh’s previous valuation of €2.6 billion was trimmed to €2 billion. Moreover, the portal borrowed money from Rocket at shocking interest rates.

Internal documents obtained by WirtschaftsWoche show that Hello Fresh borrowed €50 million in April 2016. The sum will have to be repaid within three years at a yearly interest rate of 11 percent – considerably higher than the 7.5 percent Hello Fresh is currently paying to the Dutch Rabobank on €20 million in credit. While Rocket is silent on the high costs of its loans, Dominik Richterm, chief executive of Hello Fresh, argues the fact the loans were granted in the first place “is a sign of the robustness of our business model.”

Delivery Hero and Hello Fresh are Rocket Internet’s only two flagship projects. Much depends on their success. Based on the results of the last investment round, the value of Rocket’s six most important shareholdings is €3.07 billion. But the current stock market valuation is just €2.7 billion. Rocket Internet appears to have lost its magic, and Mr. Samwer’s dream of building the biggest internet empire outside United States and China remains just a dream, at least for now.

 

This article first appeared in WirtschaftsWoche.