Tag Archives: Zalando

ZALANDO + ASOS = Love For Ever?

As I was landing in Athens yesterday evening (March 14) and going over my regular Close Of Business (COB) share price checking, I couldn’t help but notice a material and sudden 3% jump of ASOS shares at 3:57pm GMT, 33mins before COB. Wow what hapened there? The move can be explained by a 3:57pm announcement that Mr Anders Holch Povlsen bought 1m shares (c1.2% of the entire company) through his investment vehicle Aktieselskabet, with Tybourne Capital being the seller. The largest shareholder of ASOS increased his stake even more to above 29%, just shy of 30% at which level he would be obliged to do a tender offer for ASOS. 

This is big news and there are a few scenarios why Mr Povlsen increased his already big stake at ASOS. I doubt he wants to do a tender offer and I doubt he just thinks ASOS is undervalued and he can sneak in an extra 1% of the company at a good price as if that would make any difference to him. I also doubt that he was sitting at a pile of cash he had nothing to do with (although he is indeed a wealthy man) and thought “hah let’s buy more ASOS”. I believe he is thinking a lot more strategically. After all he is the owner of well known brands like Jack & Jones and Vera Moda with thousands of stores around the world and he needs to partner with big online platforms. Should investors start entertaining the scenario of ASOS and Zalando merging together!?

It actually makes sense for both Mr Povlsen and the rest of the shareholders at both companies if you think about it. I can think of 8 very good reasons why:

  1. The bargaining power with third party brands would increase…materially. The merged entity would be the undisputed global leader in online fashion and THE priority platform for third party brands. With more than 30 million active customers globally, active specifically on Fashion, any fashion brand would be crazy not to have the merged entity as the no1 parner of choice. Even investors’ concerns about the impact of Amazon Fashion on both ASOS and Zalando would diminish as Amazon would find it very difficult to compete with such a proposition.
  2. ASOS and Zalando operate in complementary geographies. Zalando is very strong in Continental Europe, ASOS is extremely strong in the UK and Australia and strong in the US, Russia and some markets Zalando would need time and money to invest with unguaranteed results.
  3. ASOS is strong in fashion and curation, Zalando is strong in technology. The combination can be explosive!
  4. Infrastructure efficiencies. Infrustructure, which is a bottleneck for both companies, is also complementary and material economies of scale can be achieved. Zalando has extended and automated warehousing in Germany where ASOS is now trying to build up (ASOS would no longer need to go through warehouse maturity and potential sales disruption). ASOS is building up the US (Zalando is not present there) and has a mechanised warehouse in the UK where Zalndo cannot break through despite years of investment.
  5. Operational leverage. The merged company could leverage costs better (marketing, personell etc) and achieve a combined higher EBIT margin than the sum of the parts currently.
  6. Talent acquisition and career development, a major factor for growth companies, would become easier. Who wouldn’t want to work for such a company? It would be the Google of fashion.
  7. The two companies have an overlapping shareholder basis which could make a merger technically feasible. Anders Holch Povlsen owns 29% of ASOS and 10% of Zalando. Baillie Gifford owns 9% of ASOS and 7% of Zalando. Capital Group owns 10% of ASOS and some part of Zalando (although it is not a top7 shareholder there).
  8. It increases stock liquidity  (particularly important for Zalando who has some Private Equities as shareholders) and makes it easier for some shareholders to divest their shareholding (of a larger Group) and many large cap long onlys to come in. Let alone the new company would be a large cap name, elegible as an investment with more funds (a dual listing in FTSE100 and Xetra DAX would be possible). The merged company would enter a more mature phase with its ownership structure and likely more stable one, which would make it a more appealing investment. 

How could the shareholder structure shape up?

If a meger was to happen I would bet money that Mr Povlsen wouldn’t sell a single share owning c18% of the merged company. I remember him telling me a few years ago “Chris I am not an investor. Investors buy and sell. I only buy”. I would dare to say that he would have a leeway to even own 11% more. Baillie Gifford would still own c7% of the merged conpany. Capital as a major ASOS shareholder would also be happy with a merger and could even increase its stake from a c5% initial stake. Maybe Kinnevik, a couple of hedge funds and the founders on either side of the trade (if they want to be less involved) could sell with their stake being picked up by Mr Povlsen and other long onlys (in the short term of course plenty of hedge funds would get involved). Given the shareholder structure I would expect an “all share merger” with a c38%/62% ratio based on current market caps ASOS/Zalando if such an event was to happen. 

What could the Board of Directors look like?

Admittedly there are a few cultural differences in the business philosophy of the two companies. ASOS focuses on customer engagement more with Zalando being the tech freaks. ASOS has a British BoD and Zalando a German one. Different mentalities yes but I don’t think that the gap cannot be bridged if the owners want it and when the potential success can be so mutually beneficial.

Let me speculate on who could manage the merged entity in an assumed merger. In a scenario where there are two CEOs then I can see Nick Beighton and Rubin Ritter filling up the two positions. Rubin can act as a COO as well given his experience. Helen Ashton would stay as the CFO given she is very thorough, numbers focused and well liked by investors. In another scenario though where the merged company goes for single handed roles then Nick Beighton could be the CEO given his extensive (successful) experience at ASOS, longer than anyone else from both ASOS’s and Zalando’s Management Boards. (A technical complication could be that usually with mergers the larger company places the CEO, i.e. Zalando in this case). Rubin Ritter would then be the CFO as he is the one dealing well with the company’s financials from Zalando’s trio and is Zalando’s main face with investors. David Schneider who deals “with fashion” at Zalando would likely find that this is the bread and butter within ASOS while Robert Gentz could be redeployed but cannot claim either the CEO or the CFO role in my view.

The merged company would then need a Strategy team (ASOS doesn’t have one at the moment), which Birgit Haderer (Opp) at Zalando could fulfill (she has been a Goldman Sachs banker in the past). The Head of IR role would stay with Greg Feehely at ASOS who has won plenty of “Best IR” awards during his career at ASOS and has ample of experience dealing with investors and analysts. 

It makes sense right?

The merged company (ZALASOS!?!?) 🙂 would have sales of more than 5bn, EBIT of 300m, growth of c25% with plenty of efficiencies to be extracted and material growth and margin opportunities. It would make sense right?

Author: Chris Chaviaras

Disclaimer: This is not an advice to buy or sell shares at either ASOS or Zalando. Do your own research before you reach any conclusions. I don’t currently own any shares of the two companies and I don’t plan to do so for at least the next 72 hours.

Can Zalando shares continue to achieve new historical highs post today?

I thought Zalando shares should be up more than 10% today…

This is more of an educational comment rather than a view really because I haven’t formed strong views yet on Zalando. When I got the company’s release I thought the shares today should probably be up more than 10%. Why? Well because the level of upgrade vs. previous analysts’ estimates was c11-13% give or take so if shares were to support their current EV/EBIT multiple the stock should be up 11-13% mathematically. Of course it is never pure maths. Zalando reported strong 3Q sales and EBIT and said that for the full year it maintains its sales growth guidance towards the top end of 20-25% (so no change there) but the margin will now be 5-6% vs. 4-5.5% previously. This is an extra 75bps people will factor in their models. This is an extra more than EUR20m on top of an existing FY16 EBIT estimate of around EUR175m.

…but they aren’t. Is it “travel and arrive”?

When trading commenced and the stock was up only 4% I was very tempted to buy it. I didn’t, got scared a bit and then stock moved to +1% and I was completely put off thinking that there is a material “travel and arrive” here but is there really? I mean on July 18 it was trading at EUR27 and now it is 43% higher so it is enormous in just 3 months. Indeed BUT since July 18, when sentiment was already extremely low for the shares, as documented by an 18% short interest according to Markit, the company raised margin guidance twice (on the 18th of July and today 19th of October) worth combined more than 30% increase on EPS estimates. So with shares being up 43% since then it doesn’t sound too unreasonable. Especially if you think that prior to the 18th of July shares were down 27% YTD so really this 43% share price increase mostly erases previous losses. Stock is up 7% YTD vs. ASOS up 46% (sterling has depreciated by c20% though so in EUR terms the outperformance is more moderate) and I still like ASOS a lot. So why get scared with Zalando’s share price at this level?

Can Zalando move higher post today?

I think I got scared due to behavioural biases. Current share price is a historical high (but absolute numbers should mean nothing. The valuation is not that bad actually) but momentum guys will say that this is actually a good thing. In valuation terms Zalando seems to grow sales at a level similar to ASOS with an EBIT margin 1% higher than ASOS now, being of similar PE (c70x) and EV/Sales (c2x). And I still do like ASOS as I mentioned in my post yesterday especially if it pulls back a bit temporarily. So I should have probably bought the stock in the morning. It is now back up 6+% (damn it!) as I write (I write so slow) and I am still very tempted but better if I write in the disclosure I don’t own this stock and then do a bit more research so that I feel comfortable with the longer term.

One caveat

Zalando operates only in Europe, so their Total Addressable Market is a lot smaller than ASOS’s, which has to be factored in the valuation (I think Zalando deserves a discount to ASOS longer term unless ASOS starts doing badly in the US, which I cannot foresee, but not every investor may think the same after today).  The growth opportunities in Europe are still ample for Zalando. I think Zalando shares can achieve new highs, it is an innovative company with a good business model and operates right in the centre of a growing online fashion theme that I like. Like ASOS. Although their business models have distinct differences. Zalando’s track record is young and did have some very volatile margin outcomes a few quarters back. To be fair to management they have multiple times mentioned that sometimes excess growth can be captured by compromising near term margin. I get the idea and they do seem to control it but building rapport with investors needs time. Worth exploring the buy opportunity but it is not for the faint hearted.

Author: Chris Chaviaras

Disclaimer: The author has no position on Zalando currently.