NEW YORK, August 20, 2011 -- A new financial research report just released on private company Groupon, Inc. from PrivCo.com concludes that the group buying company faces an imminent need for financing due to a deteriorating cash position, and otherwise resulting in an impending risk of insolvency (bankruptcy).
Groupon's Deteriorating Financials:
Groupon's financials have begun to lose momentum and have started to deteriorate due to new, better funded competition, particularly from Amazon.com-backed and privately-held LivingSocial, which holds over $500 million in cash, and from public company Google, Inc. with over $40 billion in cash. Google's recent acquisition of the largest daily deals aggregator DealMap, an approximated $100 million purchase, as well as Google's undercutting Groupon on its share of merchant offers, to as little as 25% vs. Groupon's traditional 50%, have forced Groupon to compete on price and bringing its average cut of Groupon sales to 38% as of June 30, 2011 from over 45% at the same time last year.
Further, user purchase activity has also fallen off a cliff, cut nearly in half in just the past year. According to Joseph Ranzenbach, Vice President at PrivCo, "the average registered Groupon member, which as recently as March 2010 was spending an average $5.70 per month on Groupons is now spending nearly half that at just $3.00 per month and dropping."
Potential legal settlement costs, and insufficient cash on hand to manage the company's large staff size and marketing expenses are cornering Groupon into the need for immediate financing or an exit if it is to remain in business.
Groupon's Decreasing Cash Position:
As of June 30, 2011, Groupon was down to just $225 million in cash and lost $205.4 million in the just first six months of this year alone. Since Groupon's founding, just over two years ago, Groupon has lost nearly $625 million.
Since March 2010, Groupon has received nearly $1.1 billion in private financing yet only $151.4 million (just 14%) has been contributed to the company's working capital. Founders, investors, and other shareholders have been taking cash off the table at a time of which the company itself seriously needs the money (Groupon co-founder Eric Lefkofsky received over $380 million).
PrivCo.com, the leading financial data provider on major privately held companies estimates that as of today, Groupon's cash position has dipped below $200 million (what little cash flow from operations Groupon has generated recently is solely the result of brief few weeks "float" between the time which Groupon charges consumers' credit cards and the time at which it pays merchants). At the current rate of losses, Groupon will be out of cash and insolvent within six months without new financing.
Groupon's Limited Options Moving Forward:
PrivCo.com believes that, at this point, Groupon has three possible options, none of which is very attractive.
1. IPO at reduced valuation - Groupon may be able to proceed with its intended IPO despite market resistance by dramatically reducing its price and the percent of the company sold in the offering. Since IPOs are typically momentum plays with financials showing significant growth, rather than gradual deterioration as in Groupon'scase, coupled with potential legal uncertainty and new, better funded competition, an IPO may not be feasible even at a reduced valuation.
Given Groupon's circumstances, PrivCo.com believes that an IPO, if any, were to occur, it may be at a valuation below what investors, including some major mutual funds, have recently paid in venture capital funding rounds or in stock purchases on private secondary markets.
2. Private financing - Groupon could withdraw its IPO and choose instead attempt to raise private financing. Although, given Groupon'scurrent loss of momentum and its last valuation of $4.75 billion, a new financing round may come at a loss to recent investors, "a down round", which is highly unappealing to venture capital investors who would have to mark down the value of their investments.
3. Sale - Groupon may attempt to sell the company, however, PrivCo.com believes that unless its financial metrics improve, the longer Groupon waits to make a deal the more likely an acquisition would be under terms closer to a distressed sale. However, the value of Groupon's 115 million registered users does at least set a minimum for the break-up value of the company's assets, which could be as low as $2 billion.
For PrivCo's full Private Company Financial Report on Groupon, Inc., please see:
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