By Alexis Bernet, Olivier Baverez, Martín Polomar (HEC) and Ratish Singh, Luc Roberts (Warwick)
Photo: Leon Seibert (Unsplash)
Summary of IPO
The Swedish Vegan milk Oatly went public on Thursday 20 May 2021 on Nasdaq. Oatly raised $1.43B and the listing gave the company a valuation of about $12B.
Oatly tap both into the favourable context for IPOs and the surge in demand for vegan products. Oatly has experienced significant growth in the last few years. In 2020, its revenue more than doubled, to $421M. Oatly is now the first oat-milk company in the US, in Sweden and the UK. Oatly is a very popular company, enjoying the support of some celebrities (Jay-Z; Oprah Winfrey) and the success of its marketing strategy.
The money raised should fund growth according to Oatly. Oatly faces a highly competitive sector with big food companies (Nestlé, Danone) and a smaller one which rides the trend f vegan food (Beyond Meat).
Company and IPO Profile:
Sector(s): Vegan food - Oat Milk
Exchange floated: Nasdaq
Amount raised: $1.434B
Offered price and number of shares: $17 and 84.4M shares including 19.7M existing shares and 64.7M new shares.
Over-allotment option: 12.7M shares from selling shareholders
Equity offered: 15%
Valuation and relevant multiples at IPO:
Market Capitalization: $12B
Lead book-running managers: Morgan Stanley, JP Morgan and Credit Suisse
Book-running managers: Barclays, Jefferies, BNP Paribas, BofA, Piper Sandler and RBC Capital Markets
Notable investors: China Resources in partnership with Verlinvest. Oprah Winfrey and Jay-Z
Widening the product portfolio is Oatly’s number one priority. Proceeds from the IPO will be invested to that end. If we think of the US market for plant-based milk, Oatly’s share (4.3%) is dwarfed by that of bigger veteran companies like Danone (30.2%). This strategy is called concentric diversification in the theory of managerial economics; by developing products in the adjacent market to that of plant-based milk, like Oatly’s “oatgurt”, the company appeals more to consumers and harvests more sales among the already existing consumers in new and different product varieties. As a result, Oatly expects newfound paths of profitability and a stronger hold on the market.
Along with broadening the array of products, Oatly plans to build new manufacturing facilities with the raised capital. Indeed there is still a lot to be made in milk. The global market for plant-based milk alone is expected to be worth $19.5b by 2024 (Goldstein Research).
Admittedly, because of the negative EBITDA, Oatly is dragging (-33.6% of revenue 2020) some of the cash raised may be directed towards debt settlement ($233M total debt as of December 2020). However, this is not certain, and a mention of it is nowhere to be found in official statements.
Founded in 1995 in Sweden, Oatly brands itself as the world’s first and largest oat milk company, having offered plant-based milk alternatives to consumers for over two decades. Its best-selling products in the UK and Germany have allowed Oatly to emerge as the market leader in these core European markets which has boosted profitability, with the EMEA region being the most profitable geographic region for the company. Oatly’s largest stakeholder is investment vehicle Verlinvest at 47.5%, which has a diverse food & beverage portfolio including coconut water company Vita Coco. Alongside other institutional shareholders such as Blackstone vehicle BXG Redhawk, individuals shareholders Oprah Winfrey, Natalie Portman, and Jay Z have attracted media attention to Oatly in the run-up to the float.
The stock (NASDAQ:OTLY) climbed 29% from $17 to $22.7 per share in its opening trading session, representing a market cap of $13.4bn. In the week following the IPO, the market has continued to support this valuation, with the stock trading between $20.3 and $23.7. The positive market reaction highlights the significant growth opportunities for Oatly and the broader oat milk industry, with relatively weak penetration of milk alternatives globally. The increased focus on impact and ESG-centric investment has also contributed to Oatly’s success. Their flagship cow milk alternative claims to release 80% fewer greenhouse gases and consume 60% less energy.
Potential Risks and Downsides
Relative to its comparable companies, Oatly has been trading at expensive valuations. Based on a last traded share price of $20.73, Oatly is valued by the market at a consensus forward FY21 and FY22 EV-Revenue multiples of 19.8 and 13.8 respectively. Other successful plant-based substitute companies are valued more conservatively, such as Beyond Meat which trades at respective multiples of 8.6 and 6.4. Combined with the prospects of a significant upcoming competition in the industry, this leaves scope for some downward pressure on share prices.
Two key companies pose a threat in terms of competition: Danone and The Hain Celestial Group (HCG). According to research by Allied Market Research, Danone matches Oatly in its brand differentiation and geographic presence but has to expand its product portfolio to eat into Oatly’s market share. HCG on the other hand has a wide portfolio and can prove to be a significant player by optimising marketing strategies. Essentially, Oatly can be expected to face established competition and this may prove troubling keeping in mind low consumer switching costs.
Lastly, only the EMEA region has been profitable for the company yet. The Americas and Asia regions with high marketing costs, low consumer penetration and nascent industry for the latter are currently dragging down the bottom line. Investors should keep a close eye on this regional breakdown especially with Oatly allocating a good chunk of their future growth to their “largest near-term opportunities” (Prospectus).