Ozon, Russia’s leading multi-category e-commerce company, announced yesterday it has filed for an initial public offering (IPO) in the United States (see prospectus), one month after starting the registration procedure.
The company intends to list its American depositary shares (ADS) on the NASDAQ. No pricing terms were disclosed, but Reuters reported that Ozon “could raise at least $500 million,” citing two unnamed “financial sources.”
According to these sources, Ozon is also considering listing its ADS on the Moscow stock exchange along with or shortly after its planned US IPO. The company declined to comment on this potential Moscow listing.
Online sales boosted by Covid-19
In 2019, Ozon’s gross merchandise value (GMV)1 amounted to 80.5 billion rubles ($1.25 billion at the average exchange rate of the year), up 93% from 2018. Growth has been accelerating this year, with GMV surging 188% year-on-year in Q2 2020, or 152% during the first half of this year.
In total, according to market research agency Data Insight, online sales of physical goods in Russia could reach 2.5 trillion rubles this year ($32 billion at the current exchange rate) and potentially some 7 trillion rubles (nearly $90 billion) by 2024.
“In addition to the vast room for structural growth in a market that has seen relatively low penetration and high fragmentation, Russian online retailers received an additional boost from the lockdown environment on the back of the Covid-19 outbreak this year” – and this effect could be long-lasting, believe Oksana Mustiatsa and Mikhail Terentiev, market analysts at Sova Capital.
“We think that Ozon, being the second largest multi-category e-retailer in Russia, is well positioned to benefit from these trends due to its rapid marketplace development (already over 50% in GMV reached in June) and the expansion of its logistics and fulfilment capabilities,” they told East-West Digital News in a recent exchange.
Predicted losses and company risks
However, but unsurprisingly, Ozon concedes in its IPO prospectus that it is “likely to continue to incur losses” as it continues to “invest in order to grow, and may not achieve profitability going forward.” The company, which is among the most well-funded tech companies in Russia, “may need to raise additional funds to finance [its] future capital needs.”
In the first nine months of 2020, Ozon’s losses reached 12.8 billion rubles (approximately $180 million at the average rate of the period). This considerable amount is explained essentially by the company’s investments in logistics, Ozon told EWDN. In the same period of 2018, losses were even higher, amounting to 13.0 billion rubles ($200 million) .
The “Risk factors” section of the prospectus highlights interesting details, including a dispute with Sber. The state-controlled financial and tech giant (previously known as Sberbank) is demanding 1 billion rubles (around $12.5 million at today’s exchange rate) from Ozon for terminating an agreement between the two companies in September 2020.
“The term sheet provided for payment by us to Sberbank of Russia of a break-up fee equal to 1 billion rubles in the event of breach of an undertaking. (…) We have provided an explanation why we believe that we are not required to pay any break-up fee. Should Sberbank continue to pursue the payment of the break-up fee and should we be unable to amicably reach a resolution, the final amount of a break-up fee, if any, will be determined in arbitration proceedings.”
The prospectus does not specify which transaction this term sheet referred to. Assumingly, it relates to a considered investment in Ozon, with Sber acquiring a 30% stake, as reported in June.
Ozon notes that it “may face an increasing number of such claims, including those involving high amounts of damages,” as its business expands, and even more after it becomes a publicly listed company with a higher profile.
Legal and political environment
The prospectus points out potential financial risks related to the recent and potential changes in Russian legislation in such fields as e-commerce, data protection, related internet services and Big Data.
The Russian economy in general, and Ozon’s business in particular, could also be affected by the fact that many businessmen are exposed to prosecution in Russia, reminds Ozon — an implicit reference to the fact that the executive team of Baring Vostok, an investor in Ozon, is awaiting trial in a controversial legal case.
The existing or potential new international sanctions targeting Russia expose companies like Ozon to certain risks — even though the prospectus specifies that orders from Crimea account for “less than one percent” of company revenues. Ozon has “no facilities, assets nor employees” in this disputed territory, and local customers’ orders are delivered by third-party providers.
Russian IPOs on Western exchanges
Despite the unfavorable geopolitical context, several Russian digital companies raised substantial amounts on Western exchanges in the past years — or are considering doing so in the future.
The latest cases include HR platform hh.ru, which went public on the NASDAQ in June 2019; Yandex, which raised there $460 million in June 2020; and Mail.ru Group, which is about to raise $600 million on the London Stock Exchange.
Another Russian digital major, ivi.ru, is also eyeing a Western IPO. The company did not make official statements about it yet, but two bankers last month confirmed to Reuters that ivi was considering going public in the short term.
Yandex.Taxi, the promising ride-hailing company of Yandex and Uber, was actively preparing its IPO last year. The listing, initially scheduled for 2020, has however been postponed due to market conditions surrounding the coronavirus pandemic.
(1) GMV is the total value of orders processed through Ozon and revenue from services to buyers and sellers on the platform, excluding Ozon Travel. GMV is inclusive of VAT, net of discounts, returns and cancellations.
