Jumia parent company, Rocket Internet, is buying back its shares. This is certainly surprising for a company that is known to be raising new funds to start new digital companies or pump into current ones. Buying back its shares means that it is turning everything on its head. It wants to return money to investors? Not really, I do think it wants to boost its share price, which is not a bad thing.
The Management Board of Rocket Internet SE (“Rocket Internet”), with consent of the Supervisory Board, has resolved to carry out a share buy-back program with a total maximum consideration (excluding ancillary costs) of up to 100 million Euro and a maximum volume of up to 5,000,000 shares, representing a maximum of up to 3.03% of the outstanding share capital of Rocket Internet (the “Share Buy-Back Program”). The buy-back will be executed via Xetra trading on the Frankfurt Stock Exchange and will begin on August 14, 2017 and end on April 30, 2018. The repurchased shares are intended to be redeemed, and Rocket Internet’s share capital is intended to be reduced accordingly.
First, share buy-back “occurs when the issuing company pays shareholders the market value per share and re-absorbs that portion of its ownership that was previously distributed among public and private investors”. For Rocket Internet, there are three main reasons why this company will do this:
- Rocket Internet shares are very cheap, so it wants to get many out there in-house. You buy back when you believe that your stock value is undervalued by the market
- Vision is stunted, so buy-back can generate short-term share appreciation. You have no practical means (minus the share buy-back) to generate value which will move the shares.This comes after many frustrations that nothing has worked, over months and years, to get the stock going north.
- Balance sheet is dislocated and some funds can be expended to pump up the shares. You have very terrible ratios and by reducing the number of shares available, you will magically improve many indicators like earning per share. Just like that, you will join some clubs, because the ratios will look good.
Many short-term investors will rush to the stocks to take advantage of this announced buy-back. As interests build, the stock will appreciate in value over the next few days, weeks or months since it expects to end it around April 2018. So you will see a decent price per earnings over the next few months.
Rocket Internet is doing well and it deserves a lot of commendation for even having this type of money to spend on buy-back. It does means it is generating cash. Over the last few months, they have listed a company (food logistics company Delivery Hero), sold companies (its Lazada stake to Alibaba), raised new capital, went to bond market and did all they needed to do to survive. The brilliance of the Management has seen the company holding excess of 1.7 billion euros in cash reserves. That is not a small feat.
As expected, the stock appreciated more than 6% in the German bourse where it is traded. The short-term investors are excited for quick gains. Yet, this stock position is still about half of its IPO value when it went public in October of 2014.
Rocket Internet has one big issue: HelloFresh, its meat-kit company, is undermined by the unfortunate performance of Blue Apron which went public and is turning out to be a disappointment. Amazon is rumored to be interested in this sector with the acquisition of Whole Foods. So, investors are careful in putting money in a company which may be unable to compete with Amazon, if it decides to enter the sector. With the performance of Blue Apron, there is no clear path to take HelloFresh public. This is partly one of the reasons why the stock is languishing. This share buy-back could help, albeit temporarily. They will get the rocket, in Rocket Internet, in-house, of course, nevertheless.