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17-02-2024 : Uber and share buybacks

 On the occasion of the publication of its 2023 results, the first to show positive net income ($1.9 billion), Uber announced the launch of a $7 billion share buyback plan.

Why initiate share buybacks when the group still has a net debt of $5.8 bn, i.e. 3 times EBITDA (or 1.5 times if we consider share-based compensation expensed as a non-cash expense)? Admittedly, Uber is announcing growth rates for the next 3 years of between 15/20% and cash flow growth twice as strong, which makes doubts about its ability to meet its debts irrelevant.

So, it's not a case of idle, surplus capital, as with Apple or Google. Nor is it that the stock is grossly undervalued - that's not immediately obvious at 50 times operating cash flow minus tangible investments. These are the two most common reasons for share buybacks. The issue is rather the growth in the number of shares.

Indeed, like virtually all technology groups, Uber compensates its employees through the granting of free shares, averaging $58k in 2022, but probably much, much more for employees in the key R&D and Technology department, which accounts for $1,215m of the $1,935m in share-based compensation booked in 2023. Since the share-based compensation of these employees accounts for 38% of the department's costs, their share of compensation is likely to exceed half of their total compensation, and therefore exceed the amount of their salaries paid in cash.

A share price that has doubled since the 2019 IPO is a blessing for everyone (sorry, short sellers), but the day a bearish phase sets in, some in the R&D and technology department will look sadly for greener pastures, as soon as the downward price movement is not general, but specific to Uber.

Since the IPO, the number of Uber shares has grown by an average of 5% a year, due to this effect and to the payment of external growth operations in shares. Buying back shares limits the growth in the number of shares, which would otherwise reduce the growth rates of operating parameters and threaten a good valuation. This shows a discipline that appeals to investors, and is the strength of this convention to which Uber has just adhered (in its own best interests).

PS: for those who believe that share buybacks boost share prices. The $7 billion announced by Uber, assuming it is fully realized in 2024, would represent only 2.4% of the average daily volume of transactions on the share. Not enough, in itself, to boost the share price mechanically and significantly. And academic research shows that the idea that share buybacks will boost share prices is false.

16-02-2024 : Believe's delisting - look for the mistake

Believe, a major independent music company (Jul, Naps, etc.), listed on the stock market since June 2021, yesterday announced its plan to delist. It is true that Believe's stock market life had got off to a poor start, with an IPO price at the bottom of the announced range (€19.5 - €22.5), and a share price down 15% on the evening of the IPO. However, Believe was able to raise €300 million in a purely primary transaction to finance its expansion, and had a market capitalisation of €1.5 billion on that basis.

The share price gradually fell to €8, then stabilised at around €10. Yesterday the management, Believe's main private equity fund (TCV) and another private equity fund (EQT) announced an offer of €15 and a delisting if the offer seduces more than 90% of the capital (it already has 75%). Believe's founder and CEO commented: "Since its IPO, Believe has maintained excellent growth momentum, enabling it to achieve the targets set at the time of listing two years ahead of schedule."

And here, we can't help thinking that there is either a problem with the IPO price in 2021, the proposed exit price in 2024, or the Chairman's statement. Let's rule out the last option, because a press release like this is proofread by lawyers who know how to make comparisons. Then there are the prices. If Believe is 2 years ahead of its business plan less than 3 years after its IPO, logic would dictate that the 2024 price (€15) should be higher than the 2021 price (€19.5), especially as the stock market has performed well in the meantime: +20% for the SBF 120 (dividends reinvested). Moreover, an investor who invested in the SBF120 in June 2021 has a Believe share equivalent of €23.4, compared with a share price of €12 on Friday evening and an offer price of €15.

So either the IPO price was good, in which case the exit price is undervalued, and we will read the independent expert's report with interest. Or it was not good, and the exit price is correct. This should come as no surprise, given that at the end of 2022, of the 139 companies that have floated on the Paris Bourse since 2014 and are still in existence, 77% were valued below their IPO price.  

When we talk about the attractiveness of the stock market - and the subject is far from being confined to Paris - we might wonder whether introducing bankers should not ask themselves questions about their practices in advising on the IPO price, where the battle to obtain the mandate can lead them to overbid on valuations and overpromise. And it is very difficult for a company to recover from a very negative initial effect when, on the evening of the flotation, the investors who subscribed realise that they have lost 15% of their investment in one day.

 



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The Vernimmen.com Letter

Number 155 of February 2024

News : Trials and tribulations of a start-up

Statistics : Corporate income tax rates

Research : ESG in SRI? Not in the US

Q&A : What is the rule of forty?

COMMENTS : Comments posted on Facebook