Written by: Christine Tun
Capitalising on the recent IPO boom, Swedish plant-based milk company, Oatly has hopped on the IPO bandwagon as it eyes a $10bn IPO. With most people staying at home because of the COVID-19 pandemic, oat milk’s popularity has skyrocketed with dollar sales of oat milk having risen by 212% through October 3, 2020. This is reported to be the largest rise of any food item compared to 2019.
In July 2020, the company sold a $200m minority stake to fund its expansion across Europe, the US and Asia. Reported as ‘keeping all options on the table’ (Mergermarket), Oatly had indeed been evaluating various fundraising options ahead of its possible IPO and was also reported to have explored a potential sale to a large consumer packaged goods company (CPG). However, it was announced on 23 February 2020 that the company had chosen to confidentially file for an IPO with the US Securities and Exchange Commission.
As Oatly takes advantage of changing consumer trends and a recent IPO boom, that has also overseen the public debuts of companies, Airbnb and Palantir, this article will analyse the advantages and disadvantages of an IPO before examining Oatly’s IPO plans amidst the backdrop of rising environmental, social and governance (ESG) concerns.
Benefits of an IPO
Whilst raising capital is the clearest advantage of an IPO, Oatly’s potential IPO may also produce other benefits. These include increased public awareness due to high exposure. One of the drivers of Oatly’s success is the company’s marketing and consumer engagement through its social media presence. Generating increased publicity through an IPO could provide Oatly with the opportunity to continue riding on the back of its positive public perception.
Additionally, equity financing (which comes about when a company raises capital as investors buy shares in a company) may be a cheaper source of raising capital than debt financing (through a bank loan or a bond issuance). As bank loans (from debt financing) may have high interest rates, an IPO may be a cheaper option as there is no interest expense.
Nevertheless, companies seeking an IPO are subject to enhanced scrutiny by the Securities and Exchange Commission and require an underwriting fee which can incur huge costs. When companies issue stock, it hires an underwriter who works closely with the issuing body to determine the initial offering price of the securities. They also typically ensure that all regulatory requirements are satisfied. The fee charged by underwriters may offset the advantage gained by having no interest expense. Other categories of costs such as legal and accounting fees should also be taken into consideration. However, considering Oatly has been generating revenue ($200m in 2019), they are well-positioned to stomach the costs.
Changing consumer trends and ESG concerns
The alternative milk company has benefitted from shifting consumer trends as more millennials have opted for dairy-free alternatives for health, dietary or environmental reasons. According to the research firm, Mintel, this has been highlighted by the 30% surge in UK plant milk sales since 2015. Simultaneously, as shares of plant-based meat company, Beyond Meat Inc., have risen 32% in US trading over the last year, the increased demand for alternative animal products underscore Oatly’s potential IPO success.
While Oatly is a different company from Beyond Meat, which produces products that are designed to emulate beef and patties, Beyond Meat initially went public at $25 per share in May 2019 and its first year of trading, its share price surged as high as $138.95. The success of Beyond Meat’s IPO could be mirrored by Oatly, which shares a similar mission of creating a positive impact on the environment. It should also be noted that before confidentially filing an IPO, Oatly had already been generating revenue that was twice as big as Beyond Meat when Beyond Meat listed in 2019 with roughly $88m in revenue (Forbes). Oatly’s sound financial position may enhance its attractiveness to investors.
Additionally, 2020 saw an increased focus on ESG concerns. Foods that declare their plant-based products as being eco-friendlier may be attractive to ESG investors, especially with the new carbon emission targets set by the UK government. Indeed, in 2019, Oatly introduced a carbon footprint label to its products in Europe as part of its mission to reduce the food industry’s CO2e footprint. With the UK’s new plan of also aiming for at least 68% reduction in greenhouse gases by the end of the decade, compared to 1990 levels, Oatly’s shares may stir up strong demand amongst investors.
However, per ING Research, there are three barriers that determine the future growth of alternative dairy products – one of this includes the price gap with animal-based products. With alternative milk products being costlier than dairy products, this may prevent the public from switching to alternative milk, thereby creating a niche market with generally low albeit increasing demand. Per ING Research, the significant size of the meat and dairy industry and the small base of the plant-based alternative industry means that at the current growth rate, ‘it would take until the mid-2050s’ before plant-based product sales exceeds the sales of meat and dairy. As a successful IPO hinges on consumer demand for the company’s shares, lower demand (arising from the niche market of alternative milk) may affect a company’s stock price.
In conclusion, there are strong indicators that Oatly’s IPO could emulate the success of the plant-based product company, Beyond Meat. Whilst the plant-based alternative industry may still be smaller in size than the meat and dairy industry, an amalgamation of shifting consumer trends, rising ESG interest and the success of a comparable company (Beyond Meat) highlights that Oatly will be a major IPO to look out for in 2021.