Grab Holdings, Southeast Asia’s most successful “super-app” offering ride-hailing, food delivery service, cashless payments and micro insurance, has announced on 13 April 2021 its plans to go public in the U.S.
Based in Singapore, the tech start-up is expected to see its market capitalisation boosted to USD 40 billion via the initial public offering (IPO), marking the deal as one of the largest mergers of its kind.
Here’s everything you need to know about Grab’s historic IPO to get you ready to start adding Grab shares to your portfolio.
A Closer Look at the Grab IPO
Grab’s announced IPO will place its valuation at roughly 8.5 times of revenue. This massive boost in market value will be the result of a merger that will also see the tech startup going public.
Now, getting listed on the stock exchange in a certain market is nothing special – companies of all shapes and stripes are getting listed (and also, de-listed) all the time. What’s noteworthy, however, is how Grab is doing it (more on that later), and more importantly, the impact of the sum raised.
By going public, there are two things to understand here. Grab will eliminate an upcoming refinancing risk, according to S&P Global Ratings. This is because instead of losing cash to honour a tranche of convertible redeemable preference shares, the redemption rights of bondholders will now be converted into equity (or Grab shares).
As part of the merger, investors are expected to place a cash injection into the company worth USD4.5 billion.
By wiping out the imminent refinancing risk, and acquiring an influx of cash, Grab is expected to strengthen its financial position. S&P expects that Grab will be better placed to buffer cash burn and support future expansion plans, while also lowering the amount of debt on its books.
Adding to the newsworthiness is the identity of some of the investors involved. So far, we know of three big players – T Rowe Price Group, BlackRock, and Singapore’s own Temasek Holdings, as the parties behind part of the cash injection for Grab.
But perhaps what’s most impactful is the manner in which Grab is choosing to go public.
The “Largest-ever Merger”
Grab’s IPO utilises an unusual strategy, choosing to merge with a ready-made company, instead of going through the conventional process of listing, that resulted in what Bloomberg called the “largest-ever merger with a blank-cheque company.”
The “blank-cheque company” being referred to is more properly known as a special purpose acquisition company (SPAC). As its name suggests, a SPAC is essentially a shell company (that is, it has no business operations) founded for the express purpose of raising capital through an Initial Public Offering (IPO), in order to acquire a company down the road – typically within two years.
In other words, a SPAC is money looking for a company to invest in. The “blank-cheque” part stems from how investors in a SPAC typically do not know beforehand what type of company they would be investing in.
In Grab’s case, the SPAC is held by Altimeter Capital Management, a venture capital firm based in Silicon Valley. (For clarity, the SPAC’s name is Altimeter Growth Corp.)
The decision to partner with Altimeter proved to be a shrewd one, as it turns out, going the SPAC route offers some distinct advantages over the conventional way of applying for a public listing.
The first advantage is the ability to short-cut the process. Conventional IPOs can take anywhere from 12 to 18 months to complete, given the stringent nature of the exercise. However, Altimeter has already done most of the groundwork and raised capital through its own IPO. Hence, Grab does not need to go through the process itself, bringing its timetable forward by a whole year.
Another advantage of using a SPAC is the lower underwriting fees. Instead of the customary 7%, Altimeter paid only 2.5%, with a further 3.5% jointly borne by Grab and Altimeter Growth Corp. All these savings are beneficial to retail investors, as it allows for the purchase of Grab shares at a lower price.
Blank cheques, shell companies and shortcuts – not exactly terms that inspire confidence and trustworthiness. But there’s nothing to fear; SPACs are completely legal financial vehicles and have been a part of the investing scene for more than a while now.
Key Takeaways From Grab’s SPAC-tacular Move
Now that you know why the Grab IPO has caused such a titter, here are some key takeaways to beef up your knowledge of the matter.
Grab CEO retains significant voting power
Depending on how it is achieved, raising capital can involve the ceding or dilution of control over the company. Not so in Grab’s case.
CEO Anthony Tan will retain control of 60.4% of weighted voting power (even though between him, co-founder Tan Hooi Ling and President Ming Ma, they will only hold 3.3% of all total shares.)
This indicates a desire on the part of the original founders to retain governance and oversight of the company’s direction. Having majority voting power will also be useful in speeding up decisions.
The remaining shares are held by (in descending order) Softbank Vision Fund, Uber Technologies, Didi Chuxing and Toyota Motor, according to Nikkei Asia.
Asian tech startups are attractive, but profitability continues to be a challenge
The scale and attention generated by Grab’s merger and imminent listing proves that Asian tech startups are still attractive to investors. However, profitability remains a challenge.
While optimistic about the financial advantages stemming from the SPAC merger, S&P nevertheless expects Grab to continue to be in a loss-making position over the next two years.
This is primarily due to a currency mismatch between its debt (which is denominated in USD) and its operating cash flows, which are predominantly in Asian Pacific currencies.
Conclusion
GRAB’s IPO announcement is an exciting one, not only for existing customers, but also for retail investors looking for another high-performing stock to add to their investment portfolios.
If you’re gearing up to buy Grab shares in order to boost up the performance of your investment portfolio, you might want to think carefully about the source of your funds. When you borrow to invest, make sure the loan interest rates are low enough to allow you to make a meaningful return on your investment.
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