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February 24, 2020 - 14:41
Cyprian Is Nyakundi
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Jumia: continental drift

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No fear, no thrill. Adrenalin junkies had a lot to enjoy in Jumia’s initial public offering in April. The Nigeria-based ecommerce company was dubbed Africa’s Amazon, thanks to its scale and ambition. But its prospectus also listed a litany of risks that took nearly 50 pages to describe. The shares tripled in value in the first few weeks of trading, only to fall nearly 90 per cent in the months that followed. Now, in a further sign of waning excitement, the company is being forced to retrench.

Jumia is suspending its business in Rwanda, just weeks after it exited Cameroon and Tanzania. It is beating a retreat that could reduce its merchandise sales by as much as a 10th. The impact should not be exaggerated. These activities accounted for a relatively high proportion of costs and did not promise high returns. But the cuts are a symptom of a deeper problem. The company needs to conserve cash flow because it can no longer count on investors supporting its lossmaking dash for growth.

That is a familiar theme this year. But anxiety about Jumia has been exacerbated by a short-seller’s attack, lawsuits alleging misstatements and omissions in the IPO prospectus, plus the disclosure of improper sales practices in Nigeria. Not all investors are concerned. The company’s investigation was flagged in its prospectus and had almost no financial impact. IPO-related lawsuits are common in the tech sector.

Still, the allegations, at the least, reminded investors about the risks. Though Jumia can tap into a potentially huge market it needs to overcome problems that are acute in parts of Africa. These include tricky logistics, security risks, concerns about fakes and a preference for paying cash on delivery. Jumia also faces tough competition in some markets. No wonder analysts using discounted cash flow to capture Jumia’s potential come up with very different numbers. Berenberg suggests $20 a share; Renaissance Capital just $3.50.

The fear is that Jumia, which has under €300m of cash, will run out of money before being able to fulfil its potential. Given its market value is just $438m, a cash call would heavily dilute existing shareholders. Selling a stake in its payment platform Jumia Pay might raise funds. A deep-pocketed investor might consider a buyout. Acquiring Jumia would be cheaper than building a pan-African business from scratch. Any potential acquirers, if they exist, might prefer to bide their time. The shares are cheap. They are likely to get cheaper still.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.

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