IPOs gearing up?
News about three IPOs this week reminded me that one of my signals of an approaching bull market climax is an increase in volume and a decrease in quality of IPOs. The three IPOs have very little in common:
Detsky Mir is the largest toys and children’s retailer in Russia. This week, it raised $355m, valuing the company at roughly $1bn, in a rare IPO on the Moscow stock exchange. It looks like confirmation that the Russian market has turned, although the real money was made buying 12 months or more ago.
Meanwhile Snap was in the news, as its founders have decided that its IPO shares will not have voting rights. Apparently this doesn’t matter as its 26 year old co-founder Evan Spiegel, is seen as a visionary, according to the Wall Street Journal. Lucky that because apparently the IPO is coming at around 60x sales.
I should admit here that I have never used or even seen Snapchat. It could be a revolutionary product and the IPO price could be a bargain. But I am willing to bet it won’t be.
Also in the news was Aramco, having appointed Ken Moelis to oversee its 2018 IPO of c5% of the equity and to keep the bankers in check. Apparently Saudi hope to achieve a valuation of $2tn, for a business which has never published any details of its financial performance or any details of its reserves. Corporate governance will also presumably be a question.
This is quite an interesting concept, given the current market caps of the global oil majors. Assuming they had similar reserves and similar costs of production, which of course they don’t, which would have the higher valuation, Exxon or Aramco? Clearly, the oil majors like Exxon and Shell have long histories, a focus on returns, decent dividends, which in Shell’s case has not been cut for over 70 years, and a geographical spread.
Aramco has a lot of oil, cheap production costs, and not a lot else that we know about. The point about Aramco is that much of its oil could end up lying trapped in the ground, value-less, as we move to alternative fuel sources. The world’s largest ever IPO might not be as much of a bargain as Snap, or more likely Detsky Mir.