Deep Notes on the Rocket IPO Prospectus

IPO Offering (RKET)

By Tom Dare — COO, Co-Founder Science-Inc - @tomdare

The follow are our internal notes on Rockets IPO documents — a lot of meaningful elements in here if you can get through it : )

https://ipo.rocket-internet.com/sites/default/files/files/Rocket%20Internet%20Prospectus.PDF

Rocket’s IPO pricing 10/1/14 values the company at €6.7 billion ($8.7 billion)
· Pre-money value is €5.1 billion
· The raise is expected to be €1.6 billion ($2.1 billion), offering price is €42.50 per share
· The new shares represent 24.0% dilution
· Kinnevik’s ownership stake after the IPO will be 14.2% (13.7% with the over-allotment).
2. Rocket intends to use the proceeds to maintain above 50% equity in new companies, allowing the consolidation of revenue and results in financial statements.
3. Rocket intends to fund internal companies longer and bring in third-party equity capital at a later stage, participate in pro-rata financings, and purchase secondary equity of emerging stars.
4. On 10/1/14 Rocket offspring Zalando raised €605 million ($768 million) with a post-money valuation of €5.3 billion ($6.8 billion). First day trading ended at the offering price of €21.50; dilution was 11%.
Company Structure
1. Founded in 2007, Rocket is a cross between a venture-capital fund and a consulting firm that founds startups and helps them grow. Rocket mainly serves as a holding company, with limited operations carried out at the Rocket level.
2. Rocket derives its overall value from the roughly 70 companies operating in 104 countries with 20,000 employees in three subsectors: e-commerce, financial technology and online marketplaces.
3. As of June 30, 2014, the Rocket parent group is composed of 150 companies
· 1 Rocket AG parent and 149 subsidiaries
· 35 associated companies are consolidated by the equity method
4. In the past three years, Rocket launched 57 new businesses that have become operationally active.
5. Rocket has 18 failures out of the 103 companies started since 2007, representing 6% of Rocket’s capital. A company is considered a failure if the last financing round valuation and/or exit proceeds are > €50k lower than Rocket’s investment. Merged companies are not counted.
Financial
1. The main asset on Rocket’s balance sheet is $495 million (€381 million) in Financial Assets, which reflects Rocket’s direct holdings in its companies as of June 30, 2014. They currently have $260 million (€381 million in cash).
2. Rocket’s $60.9 million (€46.9 million) Sales Revenues for six months ended June 30, 2014 is revenues received for IT, CRM, marketing, and other services to their companies, at cost.
3. Rocket has raised more than €2.8 billion in equity capital or capital commitments for the holding and portfolio companies.
4. Rocket has invested in total approximately €0.1 billion in equity capital into their network of companies with a total aggregated value of €2.6 billion
5. Rocket uses Last Portfolio Values (LPV) to measure portfolio companies based on third party valuations. As of Dec 31, 2013, the LPV is €2.6 billion ($3.4 billion).
· €1.3 Proven winners (11 companies)
· €0.3 Emerging Stars (9 companies)
· €0.02 Concepts
· €0.6 Regional Groups (30 companies in 4 groups)
· €0.2 Strategic Participations (25 total, 8 founded by Rocket, 17 contributed)
· €0.2 Other Investments (45 total, 9 Rocket and 36 contributed)
6. Rocket groups their companies based on the value of their last financing round and the maturity of their business concept, i.e., proven winners, emerging stars, concepts, strategic participations and other investments.
· Proven Winners typically have a last round valuation of more than € 100 million and two years of > € 50 million revenues. e-commerce companies in the category include Dafiti, Lamoda and Zalora.
· Emerging Stars have completed a financing round beyond Seed, generate revenue, and have KPI’s with significant growth. Companies include Lendico, foodpanda, Helpling, CupoNation, Paymill and Zencap.
· Concepts are companies that are currently in the process of being launched or in the seed financing stage. Businesses in this segment include Spaceways and EatFirst. Concepts are very young companies and have no reliable and meaningful financial information available.
· Regional Groups are holding companies, with mobile telecommunications operators in Africa, Asia, Latin America and the Middle East as co-investors. The Groups are not required to prepare consolidated financial statements for Rocket; Rocket does not have reliable and meaningful consolidated financial information for the Groups as a whole.
· Strategic Participations include participations that belonged to the Global Founders Capital Fund portfolio and were contributed in August 2014 as well as some companies that were founded by Rocket. Rocket has limited access to their financial information.
· Other Investments are uncategorized; Rocket does not have reliable and meaningful financial information.
Operating Metrics
1. Goal is for companies to reach break-even EBIT within 6 to 9 years after company launch.
· E-commerce: fashion, home & living, food, gross profit margins of 40–55% and 7–12% EBIT.
· E-commerce, general merchandise: gross profit margins of 25–30%, and 4–6% EBIT.
2. Employees headcount:
· 237 core employees as of June 2014, (1,902 in consolidated companies)
· 20,000 total enterprise; 6,300 Asia Pacific, 5,800 Latin America, 3,000 Europe, 2,800 Russia & CIS, and 2,100 Africa.
3. Rocket manages companies with tight financial controls. Each company submits monthly funding requests to explain and justify the intended use of the requested funds for the following month. The funding request is compared to actual performance, and the requested funding is approved or adjusted. Rocket extends loans to its subsidiaries as needed.
4. Management equity compensation is through options, Calls, and MIP’s (virtual call options)
· Options are through a trust relationship, with the trustee holding shares for management.
· Vesting is a 6 or 12 month cliff, followed by quarterly vesting over 4 years.
· Prior to the expiration of the cliff period, all shares can be clawed back.
· After the cliff period, a ‘bad leaver’ event can result in a claw back of all shares. A bad leaver event is violation of non-compete or good cause.
· Management Call options are to acquire a pre-defined number of shares.
· Call options are granted at quarterly intervals with a total duration of 3 to 4 years and a 12-month cliff
· A MIP of virtual call option is participation at the time of an exit.
· 6 month cliff and vesting over 4 years.
· One third of the virtual call options vests upon a change of control.
Regional Groups
1. Rocket has four Regional Groups, each with a major mobile telco investor
· Africa, 33% Rocket equity, €168m financing, €504m total valuation
o Investors are MTN and Millicom
· Asia, 50% Rocket equity, €180m financing, €360m total valuation
o Investor is Al Wokaer Holding SPC. (Ooredoo Telecom, fka Qatar Telecom)
· Middle East, 50% Rocket equity, €60m financing, €120m total valuation
o Investor is MTN (Dubai) Limited
· Latin America, 65% Rocket equity, €50m financing, €267m total valuation
o Investor is Millicom International Cellular S.A.
1. Change of Control: if Rocket is no longer controlled by one or more of Alexander, Marc, or Oliver Samwer, then Rocket may either be required to sell to the other shareholders of the Regional Group its shares at a price equal to their fair market value less a discount of 10% to 15% or to purchase all shares in the Regional Group held by the other shareholders at fair value.
2. Regional Group exclusivity: Rocket has to present all investment or business opportunities it pursues or intends to develop related to Internet, telecom, technology or new media to the Regional Group first, and to give the Regional Group the right to develop the opportunity through either an investment or operational participation.
· The end of the exclusivity differs by group, but all end by September 2019.
· After the end of the exclusivity, the other shareholders in the regional Internet group are typically given a preferential right to provide project financing.
3. Rocket Internet Non-Compete: The agreements contain a non-compete clause relating to Rocket activities and its worldwide affiliates in the region of the regional Internet group. The non-compete provisions expire between September 2015 and December 2018.
4. Obligation to Launch New Businesses: For a period ending either in 2015, 2016, or 2018 the other shareholders are entitled to request the Regional Group to launch at least 5 or 6 particular Internet-based businesses in their regions per calendar year.
· The Regional Group is to provide all necessary means for such launches.
· If Rocket believes that the planned Internet-based business will not be successful, the shareholder requesting such launch has to provide the necessary financial means.

Accounting Notes
1. Subsidiaries that Rocket controls, with and equity interest greater than 50%, are accounted for under the consolidation method.
2. Companies with a Rocket 20% to 50% equity interest, that are not controlled by Rocket but are under its significant influence, are accounted for under the equity method.
· On initial recognition, equity interest in associates is measured at acquisition cost.
· Future value is recognized at the lower of Rocket’s share in the equity capital of the associated company and fair value, if permanent impairment is assumed.
3. Changes in the Rocket’s share in the equity capital of the associated company are reflected in the line item “Income/loss from associated companies” in the consolidated income statement.
· Changes are from earnings or losses of the company or a result of financing rounds.
· “Income/loss from associated companies” is gains or losses from disposals in associated companies, as well as impairment losses (write-downs) relating to associates.
4. Financial assets are written down when impairments of these assets have occurred, generally due to the discontinuation of a business.
· Impairment recognized in the income statement line item “Write-downs on financial assets” on an unconsolidated basis amounted to €3.1 million in 2013, €3.1 million in 2012 and €2.7 million in 2011.