Lessons from the Rakuten Bank IPO
Tech-related bank deals can still get away, but investors call the shots now.
The Rakuten Bank IPO on Friday tells us that fintech or internet banking IPOs can still get away in these treacherous times – but with a considerable trade off.
Rakuten Bank and its lead banker, Daiwa Securities, have been trying to navigate a path to listing since announcing their intentions to do so in July 2022.
The deal faced challenges both external and entirely self-inflicted. As Euromoney reported in September, Rakuten was not only picking possibly “the worst time to launch the IPO of a digital bank in Asia”, as we said then, but also faced widespread concern about what the Rakuten parent was doing, transforming the Japanese conglomerate from an interesting e-commerce play into a national telco.
The requirement to build a mobile network sufficient to go head-to-head with NTT DoCoMo is expensive – and precisely the reason Rakuten couldn’t wait for more benign times to launch its digital bank listing.
Consequently, Daiwa and Rakuten found themselves forced to make an accommodation with the market. They started out pitching the deal at an indicative range with ¥1,960 ($14.64) at the top of it. Investors were having none of that. The deal eventually sold at ¥1,400 a share – and then promptly went right up to ¥1,960 on its first day of trading anyway.
So, the initial touted valuation may have been correct. But that doesn’t mean anyone is of a mind to pay it right now. This tells us something important.
Investors, so badly burned by tech in the last 18 months, want some payback, and anyone trying to launch a digital bank in this environment is going to need to understand this expectation.
Still, a deal is a deal, and Rakuten raised $625 million equivalent that it badly needs, even if initial chat around the deal spoke of as much as $800 million.
It is Japan’s biggest IPO since 2018 (another tech/telco play, SoftBank’s mobile unit). So, deals can still get done, though it helps if the business being listed has a track record rather than some elemental sense of promise.
There are still concerns about where the money is going to come from to fund founder Hiroshi Mikitani’s strident ambition
In this respect, the correct boxes are clearly ticked. Rakuten’s digital banking business is profitable and has been for several years. It is the biggest internet lender in the country.
In fact, if it wasn’t linked to its irksome debt-heavy money-burning parent, it probably could have raised a lot more. As it is, based on first-day trading, it has a value of ¥330 billion (about $2.5 billion).
“The investment case rests on Rakuten Ecosystem’s competitive advantage, growth in accounts and deposits, robust loan book growth, rising margins and low non-performing loan ratio,” says analyst Travis Lundy of Smartkarma, the research platform, in a post.
Euromoney understands that the allocation was tilted towards overseas investors even before the deal finally priced, increasing the proportion of the IPO that could be bought by foreigners.
This is interesting. Bankers in Japan have been talking about the prospect of bargain-hunting foreign buyers finding opportunity in the country for much of this year, with Warren Buffett their most famous vanguard. The problem is that official data doesn’t really support the contention of money flooding back in. Perhaps this deal is a signal.
In the broader context of the Rakuten group, though, there are still concerns about where the money is going to come from to fund founder Hiroshi Mikitani’s strident ambition. In February, Rakuten Group reported an annual loss of ¥372.8 billion. That is more than four times what this IPO raised, and in fact more than the bank’s entire market value, even after a 40% bounce on launch.
Rakuten has ¥400 billion of bonds due by 2024. There is much, much more to do for the group to get to a place of safety.