Thursday, August 13, 2020

Temasek Tracking - Netshoes (Cayman)


2000  Founded (brick & mortar) retailer
2007  Rebranded (ecommerce)
2012  Temasek invested S$86m
2014  GIC led funding (Temasek also participated)

2017  IPO
2019  M&A  Acquired by Magazine Luiza

Established in 2000 as a single physical store in Sao Paolo, Netshoes later switched into a purely e-commerce business, which now operates in Brazil, Mexico and Argentina. Netshoes was reputedly the world's largest online retailers specializing in sporting goods. 

Jazz up the operation with some fancy technology. Entice visitors to sign up. With some million subscribers, never mind if these are window shoppers, hype up the potentials of a retail outfit with a huge database of returning shoppers. And investors will suck up to it. Its the same refrain played over and over again. 

Temasek poured S$86M taxpayers' money into Netshoes in the 2012 round of funding. Sister sovereign wealth fund GIC joined in and led the 2014 funding round which raised US$170M. Temasek also joined in the GIC-led round but it did not indicate how much further capital they put in. 

Temasek'
s 8.79% holdings in Netshoes were booked under Clemenceau Investments Pte Ltd. GIC held 8.34% which were booked under Archy LLC. Apparently the 2 SWF worked hand-in-hand. Both held the view Brazil was in a sweet spot for investments and both had opened offices in Sao Paolo.

Netshoes had made no profits up to the point of IPO in 2017. It opened in the market at about US$17.00 which was way below pre-IPO valuations. Stock price initially surged to hit its highest level of about US$27 within 2 months. Then the rubber meets the road and prices headed south into oblivion until Magazine Luiga proposed a buyout at a miserable price of US$2.00. Fortunately there was a competitor suitor which eventually forced the Magazine Luiga M&A price up to US$3.70. 
Between May 2017 to Feb 2018, Temasek had divested about 20% of its holdings, obviously at substantial losses. By 31 Dec 2018 it had disposed the remaining 2,017,127 shares at below US$5.00. Total realised losses is probably upwards of S$70M. That's actually peanuts to some quarters in the government.

GIC meanwhile, displayed greater courage. US SEC filing showed it was still holding 2,506,526 shares as at 31 Dec 2018. They probably exited at the M&A price of US$3.70 and booked substantial losses.

Lesson for investors:

Retail investors at the IPO felt cheated and brought a class suit action against Netshoes. The suit was grounded on the fact that financial projections in the prospectus were hollow promises, thus misleading and tantamount to wilful misrepresentation.

The NY court threw the case out.

Investors best be familiarised with the bespeaks caution doctrine. This holds that forward-looking statements (financial projections) are not misleading if they are accompanied by adequate risk disclosure to caution readers about specific risks that may materially impact the forecasts.

In the Netshoes case, the NY Court found that alleged misstatements about the future performance of the online retail industry, planned growth strategies, and other projected outcomes were protected forward-looking statements that were accompanied by sufficient meaningful cautionary language warning investors that actual results could differ from the statements. 

The cautionary language included remarks that if “markets for [Netshoes’] Internet-based services … fail to grow as anticipated, such a lack of growth may have a material impact on [Netshoes’] … financial condition” and that Netshoes “ since … inception … has never recorded profits or positive operating cash flows in a fiscal year” and that it “may not be able to record profits or positive operating cash flow on a consolidated basis in the near future or at all.”

Investment watch:
Too late. The moneys gone. Were they reported in Annual report 2019?

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