AO.com aims to hang rivals out to dry

February 2, 2014 5:47 pm

AO.com aims to hang rivals out to dry

By Kate Burgess

White goods merchant raises price of shares ahead of debut

It is like the January sales, but in reverse. At this time of year, most retailers cut prices 50 per cent and gum “sale” stickers across their shop windows in a desperate effort to clear out their stockrooms. 

Yet Appliances Online, distributor of dishwashers and tumble dryers, has raised the price of the shares it hopes to sell to investors in the next few weeks.

Four months ago, AO.com – as it prefers to be known – was being priced at about £400m. Now the group, one of a dozen or more retailers planning to join the stock market in the next six months, is being touted around at £1.2bn-plus. That is hefty for a small company that turned over about £400m last year and made pre-tax profits of £7m.

Institutions say the white goods merchant stands out from other would-be market debutants. First, it is an internet business and a well-managed one to boot, with clear expansion plans; second, the float is not being driven by private equity owners hoping to cash out during the recent market uptick.

That contrasts with the rest of the class of 2014, which are expected to include the likes of McColl’s, the store and newsagents chain, discounter Poundland and Pets at Home. Most are owned, or partly owned, by buyout firms.

Private equity managers have a history of swallowing up quoted retailers, such asDebenhams, and then returning them to the stock market at high prices, often loaded up with debt and having failed to find a trade buyer.

The cycle has been repeated enough times to have turned public market investors against private equity-backed initial public offers for years.

However, it is a good time to buy retailers, say analysts. Consumer confidence is returning and the UK economy is in better shape. “The stars are in alignment for the first time in years,” says Eithne O’Leary at Oriel Securities.

The sector’s legacy issues – rising costs, high, inflexible rents, cut-throat competition both online and on the high street, and barriers to expansion – remain. Christmas was anything but a time of good cheer for many merchants. But if one of the companies making debuts on the stock market in the next few months can replicate the success of Asos, the online fashion retailer now valued at £5bn, it will be worth the punt. So bankers say.

However, Asos was floated on the Alternative Investment Market at £12m in 2001, at a trough in markets and without a fanfare of expectations. And it was hardly a runaway success. It took three years and a new business model to lift the shares above the 20p float price. A decade later, it will be harder to replicate the success of Asos, suggests Ms O’Leary. The dominance of the likes of Amazon and Google means that getting to the customer is harder and costs more.

By all accounts private equity sellers are being more realistic than they have been in the past. Sellers are prepping investors more thoroughly to avoid post-float disappointment. Some companies, such as Conviviality Retail, the bargain booze operator that joined the market last year, are being floated on decent dividend yields. That will underpin share prices.

Nonetheless, investor confidence is delicate. It only takes one overpriced IPO followed by a profit warning for shareholders to run for the exit, leaving their shopping baskets at the till and buyout houses with a stockroom of old clobber.