Retail broker eToro published a couple of the key terms of its initial public offering (IPO) late last night.
The company said that the offering will see its stock priced at $52 per share.
With a total offering of 11,923,018 shares, that means the total proceeds will be $620m.
However, the actual terms of the IPO are a bit more nuanced.
Half of those shares will be sold by existing shareholders in eToro. The result is that half the funds – $310m – will not be going into eToro’s coffers. Instead it is just an opportunity for existing holders to cash out some of their holdings.
The other half of the shares being sold will be newly issued, meaning the remaining $310m in cash will go to eToro as a company.
Why is eToro holding an IPO?
That structure gives some indication as to why eToro is going public.
The company is now almost two decades old and the likelihood is you have a bunch of senior management and prior investors who want to get out and sell some or all of their holdings in the company. That explains the decision by them to sell their existing holdings.
However, it’s worth noting that the company’s actual earnings have proven to be pretty volatile and appear to be very dependent on activity in the crypto markets.
Net income last year was $192.3m and in 2023 it was $15.3m. However, in 2022, the company lost $214.9m. In other words, the net income of the last two years combined was less than what the company lost in 2022.
Consequently, if you look at what the company says it will use the proceeds of the IPO for, it is just “general corporate purposes, including working capital, operating expenses and capital expenditures.”
The firm did say it may use some of the proceeds for M&A activity but it has no companies or pipeline of deals at the moment to achieve that. It is also hard to see what company they would buy at the moment, given they already have a significant number of licences and permissions in key markets.
The result is that the proceeds of the IPO that will go to the company look more akin to a buffer on the company’s balance sheet. If you compare it to peers like IG Group or Plus500, eToro does not seem as capable of making money during lower periods of market volatility.
Indeed, it has the potential to lose a lot of money when that happens. Having $310m in cash is one way to ride out those periods.
eToro IPO will not change company control
Another significant part of the IPO is the segmentation of the share classes.
As has become common in the US, particularly among tech firms, eToro has a dual-class share structure.
Importantly, Class B shares carry 10x the number of votes that Class A shares do. And it’s worth highlighting that all of those Class B shares are held by existing shareholders. As eToro notes in its prospectus for the IPO…
“Upon the completion of this offering, our existing shareholders, including our CEO and Co-Founder, Yoni Assia, will together hold all of our issued and outstanding Class B common shares.”
The result is that the existing shareholders, although they may be cashing out a lot of their holdings, will still control the company in practice. They may be keen to sell but they’re not letting go of the business just yet!