Cazoo’s car crash should spell the end of corporate American dreams

To listen to some UK founders recently – Sir Martin Sorrell of advertising firm S4 Capital or Matt Molding of online retailer THG – failing valuations are not the fault of lackluster corporate performance, but of the stock market at large. old and short-sighted London.

Thank goodness then for Cazoo.

The loss-making, UK-focused online car seller avoided the domestic market when it went public last August. Instead, it went to the US, secured an $8bn valuation on the New York Stock Exchange via a Spac deal – and lost more than 80% of its value in the nine months who followed.

Cazoo is undoubtedly a victim of the bursting of the twin bubbles. Growth stocks are out of fashion. The same goes for blank check companies. In January, nine out of 10 Spac mergers completed last year were trading below their starting price of $10. American rivals Carvana and Vroom, whose Cazoo business model founder Alex Chesterman is readily to be emulated, performed equally poorly.

Still, a month ago, Chesterman was optimistic about the beating. The “irrational exuberance” of tech names last year had now swung too far the other way, he said then. On Tuesday, however, Cazoo said it was cutting 15% of its workforce, cutting costs by £200million, reducing its business model and conserving cash in a “realignment plan”. These actions show the consequences of the erosion of exuberance. Rival Carzam blames Cazoo for taking them down.

Chesterman this week called the current economic climate a “perfect storm.” It is, as one analyst put it, the CEO’s excuse 101. First there was Brexit which underperforming bosses might blame, then the pandemic, now it’s the downturn. In reality, it was the perfect alignment of factors at the time of Cazoo’s flutter that provided the unnatural boost – skyrocketing used car prices, an unsustainable shift to online shopping and increased spending on consumption of durable goods versus services.

Instead, the company’s slump in share price should be a lesson to UK companies convinced that all they need to achieve exorbitant valuations is to list in the US, after which they will be fixed.

Admittedly, valuations are always richer in New York than in London. At its peak, US valuations on a 10-year cycle-adjusted basis were around three times higher than in the UK, according to analysis by Simon French of Panmure Gordon. That hasn’t come down much despite the US-centric sell-off this year, French says. Duncan Lamont, head of strategic research at Schroders, points out that the discount is not only due to the bias of the old economics of the British stock market. Almost all UK sectors are trading at a discount to the US. At the end of May, the industry’s median shrinkage was 23%.

There will be companies or sectors where it makes sense to pursue a US listing as well. SoftBank is probably correct that Arm, a large and mature technology company, is likely to get a better price and a more knowledgeable analyst base in New York. The same may be true for many European biotech companies.

But the pursuit of outsized and unsustainable valuations can have real consequences. Momentum works both ways. A downward spiral can drive a company’s stock below what it would have deserved to trade, says French. Once this cycle begins, it becomes more difficult to secure new funding due to the pain of accepting such significant dilution.

For now, this is a problem largely confined to private markets, as venture-backed companies struggle to complete new rounds of investment. Cazoo estimates he has around two years of cash on hand thanks to the £622m he raised through the Spac deal and the $630m convertible bond he issued in February. By 2024, it could be profitable. (Last year it suffered a loss of £550m, although £241m was a one-time expense related to the Spac merger.) But it may instead find it difficult to raise capital as small business focusing exclusively on foreign markets.

London is in some ways lucky that Cazoo did not choose a domestic IPO. Flops like Deliveroo have already tarnished the exchange. Cazoo’s car accident would have had an outsized impact here. This should, however, chastise UK founders who think a US listing is the answer to all their problems in the public markets.

[email protected]
@catrutterpooley

Municipal bulletin

For a morning roundup of the latest business stories, sign up for Cat’s City Bulletin

Comments are closed.