Just Eat, the private equity backed takeaway directory website which claims to account for half of the UK online takeaway market, has chosen HGS for its IPO next month. The HGS was created by the London Stock Exchange (LSE) just over a year ago in order to combat the trend of high growth/tech companies, including European based companies, choosing NASDAQ as the venue for their IPOs. In light of this; how does the Just Eat IPO stack up? As the name suggests, the HGS is designed to attract fast growing companies. Entrants must demonstrate at least 20% compounded growth in each of the three years prior to entering the market. Just Eat met this criteria with aplomb, but it is no easy test. Companies which cannot fulfil this criteria are unlikely to be suitable for NASDAQ as well, and the recovering AIM market may be more appropriate for them. The HGS was targeting mid-sized companies with a market capitalisation of £300 million to £900 million. At the higher end of the figures that Just Eat is talking about, its market capitalisation would be in the region of £1.4 billion. Equally Just Eat intends to raise far more than the HGS minimum of £30 million on its IPO. Given these numbers, Just Eat could easily justify (and was until recently considering) a premium listing on the LSE’s
Main Market (Premium Listing). So why has it chosen the HGS instead? One of the main factors seems to be the lower “free float” requirement, being the percentage of a company’s shares that must be in public hands (being shares held other than by management and shareholders who hold 5% or more). Just Eat intends to have a free float of 15% to 20%, easily meeting the minimum 10% free float requirement of the HGS, and thereby allowing Just Eat’s management and private equity backers to retain up to 85% of its shares. This would not have been possible on a Premium Listing where a minimum 25% free float is required. The lower free float requirement is one of the key and much talked-up features of the HGS, so it could be argued that it has done its job. But it is worth noting that Just Eat may have a free float of up to double the minimum 10% requirement, and not that far off the minimum requirement on a Premium Listing. Some commentators have raised concerns that UK institutional investors may be wary of a free float of just 10%, fearing that this could give rise to a lack of liquidity. The Just Eat IPO is not likely to resolve those concerns one way or the other. There has long been a perception that the US markets have a greater (risk) appetite for backing high growth/tech companies and tend to place higher valuations on them. At the prices being talked about, Just Eat’s valuation is a very punchy 100 times its EBITDA. A higher valuation on the US markets was not therefore likely in this case. However, it should be borne in mind that Just Eat is a market share play; its business model is not predicated on any proprietary or innovative technology. More “tech” based companies may still feel that they are likely to receive a better reception on the US capital markets, as well as viewing a US IPO a way of gaining traction in the US commercial markets.
Jai Bal is a partner at Wedlake Bell
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