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Groupon IPO dented by market, new numbers

An online coupon sent via email from Groupon is pictured on a laptop screen in Los Angeles
An online coupon sent via email from Groupon is pictured on a laptop screen in Los Angeles

By Alistair Barr

SAN FRANCISCO (Reuters) - Groupon Inc's plans for an initial public offering have been dented by the stock market slump and new financial disclosures that suggest the daily deal company's business is slowing in North America, analysts said on Wednesday.

The tech-heavy Nasdaq Composite index fell more than four percent on Wednesday, leaving it down about 13 percent in the past month.

The CBOE Volatility Index, a closely watched measure of investor concern, surged 20 percent earlier in the day -- the third session in the last five that it has jumped at least 20 percent.

"Any shock to the market like the one this week is bad for anyone with IPO dreams, especially Groupon which did not have time on its side in the best of circumstances," said Sucharita Mulpuru, an e-commerce analyst at Forrester Research.

A technology investment banker pronounced the market shut for IPOs and said the hope is for stability in September. The person did not want to be identified because they are not authorized to speak publicly.

Enduro Royalty Trust, TIM w.e., InvenSense, HomeStreet, WageWorks and Loyalty Alliance Enterprise have all postponed IPOs recently.

In June, Groupon filed to raise $750 million in an IPO. The company has been working toward a stock-market debut in mid to late September. It has not launched a roadshow yet, so it may be too early for the company to decide whether to proceed based on the health of the broader market.

Groupon updated its IPO filing with the Securities and Exchange Commission on Wednesday, suggesting it is still working toward an eventual offering. However, falling stock prices have likely pressured the valuation of the company.

After LinkedIn Corp shares more than doubled in its stock market debut in May, Groupon's proposed valuation rose to roughly $30 billion, according to Scott Sweet, senior managing partner at IPO Boutique.

"Now we're talking likely far less," Sweet told Reuters. "Its market cap is no longer anywhere near what was proposed."

Groupon is growing fast, making it attractive to investors facing a slowdown in economic growth, according to Peter Bible, a partner at accounting firm EisnerAmper and the former chief accounting officer of General Motors Co.

That means Groupon can probably complete an IPO in almost any market conditions, but the company may have to cut its valuation and the amount of shares it sells, he added.

"The IPO market is virtually frozen because of general uncertainty," Bible said. "It may be better to go back into the closet for a while before they try to go public."

NORTH AMERICA MATURES

Groupon's latest IPO filing may not help because some of the company's new disclosures suggest its North American business is maturing.

Revenue rose to $878 million in the second quarter compared with $644.7 million in the first quarter and rose more than 900 percent from $87.3 million in the second quarter of 2010, the company reported in the filing.

The numbers show Groupon's growth slowed from the first quarter. Revenue was up 36 percent in the second quarter, below growth of 63 percent in the first quarter.

The number of Groupon subscribers jumped to more than 115 million at the end of the second quarter. But revenue per subscriber fell 12 percent to $8.57 in North America, according to David Sinsky of Yipit, which tracks the daily deal industry.

The decline suggests Groupon subscribers in North America are becoming less engaged with the company as rivals compete more for their attention, Sinsky said.

Another worrying trend emerged on the merchant side of Groupon's business in the second quarter, according to Sinsky.

Groupon reported its North American merchant pool -- the number of businesses that are waiting to run a deal with the company -- slipped to 20,041 in the second quarter from 20,233 in the first quarter.

That compares to big increases in the North American merchant pool in previous periods. This pool jumped 47 percent in the first quarter of this year and 38 percent in the final three months of 2010.

"I don't think market conditions are grounds for delaying the IPO," said Ben Edelman, an associate professor at Harvard Business School who has been critical of Groupon. "But Groupon's deteriorating business may be a reason to delay.

"Revenue per subscriber and revenue per merchant are declining in North America. People seem to be getting sick of it and that may reduce investors' interest in buying stock in the company."

ACCOUNTING QUESTION

Groupon also dropped a controversial financial metric from its latest IPO filing on Wednesday.

Concern about marketing costs led some to question Groupon's use of "adjusted consolidated segment operating income," or ACSOI, which excludes online marketing expenses, stock-based compensation and acquisition-related items.

In the first quarter of 2011, Groupon reported a $117 million operating loss, but ACSOI was almost $82 million. That is partly because some $180 million of online marketing spending had been stripped out.

The company in its latest filing used a measure that includes marketing expenses, but not stock-based compensation or acquisition costs. On this basis, Groupon lost $62.3 million in the second quarter, an improvement from the first quarter when it lost $98.3 million.

"I'm glad to see they changed that because it would not have been a good precedent," said Bible of accounting firm EisnerAmper. "There's a question of how much taint will linger from this accounting issue. It raises questions among investors about the company and management."

(Editing by Edwin Chan, Brad Dorfman, Derek Caney and Andre Grenon)

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