10 ★ FINANCIAL TIMES Friday6 September 2019
Slack’s unusual approach to joining
public markets was chalked up as a
success.Its Junedirect listing, with the
catchy WORK ticker symbol, was
impressively orderly. Bankers and
investors wondered aloud whether
initial public offerings might one day
become obsolete. Were roadshows and
lock-up periods for investors selling
sharesnecessaryif direct listings
worked so well?
Slack’s performance since then
suggestsIPOs have little to fear.Its
projection of slowing sales growth has
cut down its market value by almost a
fifth in the space of a few weeks.
On the face ofit Slack’s firstearnings
as a public company had some good
news. Revenue guidance for the full
year was raised two percentage points
to 52 per cent. But this s still a sharpi
climbdown from last year’s 82 per cent
growth and 101 per cent the year
before that. Such a slowdown looks
feeble for a company that is only six
years old, predicts growing losses and
was trading at 20 times expected sales
before earnings were released.
Founder and chief executiveStewart
Butterfield ried on his earnings call tot
keep attentionon Slack’s ability to
hook big clients. The number of
customers spending more than
$100,000 a year is up three-quarters in
the past year, he noted. Slackwas
proud of “win after win with the largest
companies in the world”. Yet just as
users of Slack’s free subscription plan
outnumber paying customers, this
groupis a fraction oftotal customers.
Retention rates are high and average
active usage of 90 minutes per day puts
social networks such as Twitter and
Facebook to shame. Companies moving
from traditional offices to co-working or
hot-deskinglike the option of an online
instant-messaging and collaboration
system. A new Shared Channels feature
will allow users totalk to external
partners. The catch is competition. As
long asMicrosoft’s rival Teams remainsSlack:
sells like team spiritfree with Office 365, Slack will need to
come up with more reasons for
companies to pay for an alternative.The roulette wheel still spins forCasino
boss ean-Charles NaouriJ. The
embattled French retailer’s fortunes
could soon improve. Yesterday, Casino
gleefully announced theaddition of
Daniel Kretinsky o its shareholdert
register with a 4.6 per cent stake.
The mandatory disclosure threshold is
5 per cent.
Mr Naouri said a seat on Casino’s
board would follow for a representative
of the Czech billionaire. That liftedCasino/Daniel Kretinsky:
Czech mateshares by as much as 5 per cent.
Support from one of Europe’s most
contrarian investors, though, serves to
highlight Casino’s fall from grace.
Mr Kretinsky has shopped around.
His purchase of a stake in Casino
follows a rejected takeover bid for
German wholesaling group Metro. He
has also picked up a stake in Le Monde.
That prompted unfounded speculation
the billionaire might want to temper
the French newspaper’s critical stance
towards climate change. His main
interests are energy. He continues to
buy up power plants including coal-
burning ones. His portfolio is eclectic.
But a common theme is his enthusiasm
for assets others shun.
Mr Naouri’s business interests
employ “Breton Pulleys”, a complex
chain of debt-laden holding companiesthat give maximum control with
minimum capital. Reducing Casino’s
leverage has been the priority since
cracks began appearing last year. Asset
sales have followed legal manoeuvring
to freeze debt repayments t holdinga
companies. An additional €2bn of
disposals ere announced at the end ofw
August. That calmed nerves in the
bond market, halving the cost of
insuring Casino’s one-year debt.
An earlier round of sell-offs worth
€2bn only reduced net debt by €1bn,
says Bernstein. Further asset sales now
pose the risk of hollowing out core
operations and earnings. Mr
Kretinsky’s arrival will not change the
problems facing the company. He is
silent on his intentions. Investors will
hope he brings fresh thinking to a
business that is running out of ideas.Hong Kongers should perhaps feel
relieved. For once, disruption was the
result of technical glitches rather than
civil strife. Hong Kong’s stock market
blamed “prolonged connectivity
issues” for the suspension of
derivatives trading. Contract volumes
in futures and options fell 70 per cent
in morning trade as traders struggled
to input trades. The Hang Seng index,
which hadrisen to positive territory,
closed down. Equity traders could not
hedge cash trades with derivatives.
It is all very embarrassing forHong
Kong Exchanges & Clearing, (HKEX),
which operates the market. Its growth
depends on expansion in derivatives.
Its systems need to be bulletproof.
HKEX has little to show so far for its
investment, including $262m for a
51 per cent stake in Chinese markets
technology firm Ronghui Tongjin.
Operating expenses rose in the first
half as t shelled out on new systemsi
and network upgrades. More money
had been set aside to upgrade its ill-
fated derivatives market platform.
An uptick in listing fees came mainly
from forfeitures. Anheuser-Busch
InBev was one of many to pull planned
listings. Alibaba’s was delayed. Had
these listings gone through, they would
not have made a big difference to the
top line. Listings are less than a quarter
of total revenues. In future, a much
bigger contribution should come from
HKEX futures contracts tracking A-
shares in the MSCI Emerging Markets
index. These hedging instruments for
Chinese mainland stocks should bring
the exchange significant volumes and
fees as more A-shares join the MSCI
benchmark. Approvals from Chinese
regulators have yet to materialise.
HKEX shares are down 11 per cent
since their July peak. They remain
pricey at 31 times forward earnings.
True, the balance sheet is strong. Total
cash has more than doubled over five
years to $3.5bn. But little else justifies a
40 per cent premium to peers such as
the Singapore Exchange. Frayed
relations with China and faulty wiring
put HKEX’s biggest flows at risk.HKEX:
futures shockReports thatWeWork aym seek a
$20bn aluation instead of $47bn whenv
it goes public seem unusually prudent
for the lossmaking shared-office group.
Then again, the scorn poured on parent
The We Company’s blend of spiritual
enlightenment, and itsfinancial risk,
plus the sour performance of other
highly anticipated US listings this year
recommend caution.Uber, Lyft nda
Slack ll trade below the closing pricesa
of their shares on the first day of
trading.
A lower valuation will pull at a
thread that threatens to unravel the
arbitrary numbers with which its
largest investor — Japan’sSoftBank—
has cloaked WeWork. Yet down
rounds, in which companies raise
money at lower valuations, are unusual
but not unheard of when companies
join the public markets.Pinterest’s
decision to price its shares in itsIPO 12
per cent below a private share sale
price has paid off. It trades more than
60 per cent above the IPO price.
But as always with WeWork, things
are not quite so simple. SoftBank’s last
investment in the company may have
come with a headline $47bn valuation.
But the funds that were used to buy
shares from investors and employees
gave the company an implied valuation
of some $20bn. If WeWork’s IPO came
with a $20bn valuation, it would not
really be a down round.
This discrepancy highlights the
extent to which WeWork’s valuation is
SoftBank’s creation. Outside SoftBank,
those numbers hold less sway. It is
possible that SoftBank would prefer to
keep pouring money in at ever higher
valuations. Yet if so, it has been
undermined by its own investors, who
seem concerned by the company's
business model.
WeWork’s S1 prospectus will not
have allayed those fears: the $47bn in
lease commitments; the ambition to go
from 111 cities to 280. These are
gigantic plans that WeWork cannot pay
for alone. Nor has the company
clarified how long it takes a particular
location to become profitable.
Forget sideline projects such as
schools, WeWork’s business is renting
commercial real estate and selling
short, flexible subleases while dealing
with unglamorous back office
WeWork:
feeling down
operations. Companies with more than
500 employees now make up 40 per
cent of total membership. But until it
has been tested by a recession there is
no way of knowing how durable the
company’s model will be.CROSSWORD
No. 16,265 Set by REDSHANK
JOTTER PAD
ACROSS
1 Prepare fleece for protecting
special blossom (10)
6 Assemble round bucket (4)
9 Societies fill posh London area
limousine, they’re jam-packed
(5,5)
10 Capital expels one Ottoman
bearing arms? (4)
12 Environmentalist identifies
expert in bed (5,7)
15 Colonist finished chopping
current duck starter (9)
17 Salt somewhat disconcerting?
Send it back (5)
18 Former newsreader, American
guy, missing Times (5)
19 English film about wayward T.
Rex fanatic (9)
20 Banned officer with one
boring existence in team (12)
24 Grand chef’s instructions
withdrawn on leaving (4)
25 Energy supplier scorched
range (3,7)
26 Locate what’s needed in home
counties (4)
27 A lot of races finish next to a
new church gate (10)
DOWN
1 Child’s play at intervals repays
you at first (4)
2 Let down smaller section of
Irish party (4)
3 Rowdy Peter’s arranged run
out in old coach (12)4 Cicero depicts bracing
weather (5)
5 Might warming cups offset
this weather feature? (4,5)
7 Leave some money in
Morecambe in vain (10)
8 Checks on earnings European
raised in chap’s seed
producers (5,5)
11 Bored? Join set around noon
(12)
13 Like to line up disguise for
ball? (5,5)
14 Poles stop working at rig
cladding for regime (6,4)
16 Small tear developed? Suspect
trouble (5,1,3)
21 Lie about what keeps me
going regularly (5)
22 List articles, one foreign (4)
23 Time invested in extra bits (4):$7&+675$3 $ 5&+
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Solution 16,Lex on the web
For notes on today’s breaking
stories go towww.ft.com/lexTwitter: FTLex@
Melrose llows the gawker to dona
X-ray specs and catch glimpses of the
internal workings of a buyout. These
are often hidden within the aggregate
numbers of a private equity group,
even if it is quoted. But the UK
industrial specialist’s last purchase —
the controversial £8bn hostile
takeover ofGKN n March last year —i
was so large that first-half group
numbers represented a progress
report.
Supporters billed the figures as
“reassuring”. The shares rose 6 per
cent. But the acquisition of the
automotive and aerospace group has
proved to havebeen awkwardly
timed. A trade war and a sputtering
world economy have left Melrose a
hostage to fortune, as stock priceweakness since the GKN deal attests.
The group’s mantra is “buy, improve,
sell”. Ideally, chief executiveSimon
Peckham ould have signalled that thew
second phase had begun in GKN’s big
automotive business. Faltering demand
for vehicles meant the operating
margin eased to 7.6 per cent. Melrose
has hired a new team to run the
division. Its task is to emulate
aerospace, whose margin jumped an
impressive 2 percentage points.
Interpreting Melrose’s X-ray is as
much an art as a science. eadlineH
operating profits of £539m included a
slew of adjustments to a statutory loss
of £11m. Some look justified — ignoring
amortisation of GKN goodwill, for
example. But restructuring costs and a
writedown on a security unit aresimply business as usual at a serial
acquirer. Thankfully, free cash flow
was positive at £60m.
Borrowings have been a worry.
Conventional private equity investors
would scoff at leverage of 2.5 times,
as measured by net debt to forward
ebitda. Melrose shareholders
evidently feared the ratio rising to
that level. They are relieved broker
Investechas forecast year-enda
figure of 2.2 times.
Melrose can only prove it was right
to buy GKN by selling all its divisions
for a fat return. This will take years.
Self-help alone cannot guarantee
success.
Investors should be patient.
Melrose is a healthy business in an
unhealthy environment.FT graphic Sources: Refinitiv; companyMelrose now trades like a carmaker
Share prices (rebased)Jan Apr Jul Oct Jan Apr JulMelroseEuropean auto
and parts indexCompulsory acquisition
of GKN sharesDeal to acquire
GKN announcedMelrose statutory v adjusted profits
Statutory
operating
loss
Amortisation
of intangiblesImpairment
of goodwillRestructuring
costsExchange
movementsAcquisition
and disposal
costs and otherAdjusted
operating
profitMelrose/GKN: visceral venture
The industrial takeover specialist made a bold gamble when it took over the venerable components group
last year. Since then, the outlook for the automotive industry has deteriorated. Aerospace has made a
stronger contribution to Melrose’s complex profits picture.SEPTEMBER 6 2019 Section:FrontBack Time: 5/9/2019- 18:58 User:alistair.fraser Page Name:1BACK, Part,Page,Edition:EUR, 10, 1