Just Eat provides first bite for LSE’s High Growth Segment

Fast-growing companies, especially in the technology sector, now have a possible new home: LSE’s High Growth Segment. Melanie Wadsworth, partner at Faegre Baker Daniels, looks at what is required to list and how one of the most promising businesses in the country is set to use it.

Just Eat, the online takeaway firm, has confirmed it will list on the High Growth Segment (HGS) of the London Stock Exchange’s Main Market when it is admitted to trading next month. In doing so, it will be the first company to join the HGS since the segment was launched in March 2013.

According to the London Stock Exchange, the HGS was created to offer a route to market for high-growth, revenue-generating companies which did not meet the eligibility criteria for the Premium segment. Historically, such companies might have looked to AIM for a listing and it is probably no coincidence that the launch of the HGS coincided with a difficult period for the AIM market, whose currency is only now beginning to recover from the impact of the recession.

That said, the intention was always that the HGS would attract companies larger than those which might sit comfortably on AIM and, with a proposed market capitalisation of at least £1.2 billion on listing, Just Eat certainly fulfils that criteria.

Although this valuation may appear steep when compared to the company’s underlying EBITDA of £14.1 million, Just Eat and its advisers have taken the view that the company’s impressive and rapid growth is justification enough (2013: number of orders up 59 per cent; revenue up almost 62 per cent to £96.8 million). Not every aspiring HGS company will be able to match such success, but it is a requirement of entry to the HGS that a company can demonstrate revenue growth of at least 20 per cent, on a compound annual growth rate basis, over the three year period preceding admission.

In seeking to differentiate the HGS, the London Stock Exchange has made much of its reduced ‘free float’ requirement. Whilst companies seeking admission to the Main Market must usually have at least 25 per cent of their shares in public hands at the time of admission, the free float requirement for HGS companies is reduced to 10 per cent, provided that the shares in public hands have a minimum value of £30 million.

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The theory is that this reduced free float requirement will encourage founder shareholders and private equity investors to list companies at an earlier stage in their development, without having to relinquish too much of their stake to outside investors. As Just Eat has confirmed that not more than 20 per cent of its shares will be in public hands, it appears that this was the key driver behind the company’s choice of segment.

The right route?

But why else might a company look to the HGS for its listing? Perhaps participating in a dedicated segment for larger growth businesses might help raise visibility within the analyst and investor community.

If more companies join the HGS, there would certainly be a distinct group on which statistics could be reported and this might lead to greater interest in such companies’ shares. However, as HGS companies are not eligible for inclusion in the existing FTSE indices, which only include Premium companies, they will not benefit from mandatory investment by FTSE tracker funds, often seen as a source of enhanced liquidity.

Indeed, for many technology companies, it is difficult to see what the HGS can offer in terms of profile when compared to techMARK, the specialist index for Premium companies who demonstrate a high level of innovation and investment in R&D.

It is worth noting that Just Eat was a participant in the government’s Future Fifty programme which aims, amongst other things, to boost visibility and exposure of selected high-growth companies to institutional investors. Other Future Fifty companies include MADE.com, Skyscanner and property website company Zoopla, which has already indicated that it is contemplating an IPO as one of its strategic options.

Whether or not Just Eat’s listing on the HGS marks the start of a trend will, in large part, depend on whether its substantial valuation can be maintained. Recent IPOs of online companies have been well-received by UK investors and boohoo.com, the online fashion retailer, saw its shares rise by over 50 per cent on its first day of trading on AIM this month.

Certainly, technology companies appear to be increasingly in vogue and if the HGS can become part of that story, this little understood segment of the market may finally strike a chord with potential IPO candidates and investors.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for GrowthBusiness.co.uk from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.