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Crunch Time: Even in Good Times,
Webvan Suffers. What About Bad?
By Adam Lashinsky
Silicon Valley Columnist
Originally posted at 6:56 PM ET 12/11/00 on RealMoney.com
Over and over I hear the comment from Webvan (WBVN:Nasdaq - news) users
that because the troubled company's grocery delivery service is so grand,
Webvan will survive. I even know savvy Silicon Valley professionals who've put
real money where their mouths are.
But in assessing the stock's chances of ever recovering -- it's worth about 53
cents per share, down from 22 (dollars) a year ago -- I offer two sobering data
points. The first is a soft but persuasive one, the jarringly candid piece in this
week's Barron's by Maryann Keller, the analyst-turned-Priceline (PCLN:Nasdaq
- news)-executive-turned, apparently, freelance writer, on why selling autos on the
Web doesn't work. The second is a perusal of Webvan's third-quarter financial
report, which contains one underexposed nugget on just how poorly the company
is performing.
Keller's piece was sobering for Webvan because it aired the sad truth: Some
industries just aren't ripe for the revolution. Sure, selling cars over the Web works
well for some affluent people, especially those who figure out how to game the
system and get a car more cheaply than they could have at a dealer. But Keller
argues that buying a car is an emotional experience, and much of the money for
the carmakers is in the add-ons. Most people literally want to kick the tires.
Similarly, Webvan is learning the hard way that pointing and clicking simply isn't
the preferred way most grocery shoppers want to buy celery, cheesecakes and
that choice cut of beef. TSC'sKatie Hobson reported in October that for Webvan
to break even in the San Francisco Bay market, home to its prototype facility,
the company would have had to record between 3,300 and 3,500 orders a day at
an average of $110 an order. Instead, the company got an average of 2,350
orders a day, at an average size of $103 an order.
The company's 10-Q filing with the Securities and Exchange Commission
contains a more distressing tidbit. "As of Sept. 30, 2000, Webvan's prototype
distribution center in Oakland, California was operating at less than 40% of the
capacity for which it was designed. Webvan does not expect any of its
distribution centers to operate at designed capacity for several years following
their commercial launch, and Webvan cannot assure you that any distribution
center will ever operate at or near its designed capacity. There can be no
assurance that Webvan's average order size will not decline significantly in future
periods."
Consider this. After five quarters of operation, at a time of unprecedented
economic strength, amid a flood of publicity, while overemployed Silicon Valley
dwellers couldn't find time to get haircuts, let alone shop for milk, when Internet
use was ramping monthly, Webvan could muster only 40% capacity at its
crown-jewel facility. If you believe the economy softens, PR is tougher to come
by, Internet usage slows and folks have more time on their hands to shop, the
picture isn't rosy for Webvan.
How bad is it? On Sept. 30, the company had $118 million in cash, and
marketable securities worth $377 million. Unrealized losses on that portfolio were
$2.2 million at the time. At the risk of pointing out the obvious, the stock market
hasn't performed real well since then. Webvan alone raised a staggering $796
million, $403 million of that (net of commissions to its bankers) from the public. It
currently is worth about $268 million, meaning that Wall Street believes not only
that Webvan will destroy the value of its cash by continuing to operate, but also
that there's no prayer of getting value from its property and equipment, valued at
the end of the quarter at $333 million.
For its part, Webvan says it will need to raise $80 million to $100 million by the
second half of next year just to keep running. That's assuming it turns on its
white-elephant facilities in the Baltimore-Washington and northern New Jersey
areas, two unused monuments to an era of easier capital and grander dreams. If
those facilities remain dormant, capital requirements would be more like $45
million to $50 million, the company says.
But how will Webvan raise that money? Dan Mosher, an
investment-banker-turned deal guy for the Foster City, Calif., company,
acknowledges that high-yield, or junk, bonds aren't an option in this environment.
Webvan presumably could borrow against its assets, the highly automated
"picking" facilities it has built. But the collateral would be predicated on someone
else being able to use those facilities. Equity is a problem, as an issuance of
new shares would further dilute current shareholders. Consider also that the
primary investors in newly acquired Homegrocer.com -- including Amazon.com,
Kleiner Perkins Caufield & Byers and Barksdale Group -- own a combined
29% stake in the company, and lockup restrictions on those shares will expire
next year.
Anthony Noto, the analyst for lead Webvan underwriter Goldman Sachs, who
rarely had an unkind word to say about Webvan on the way down, for once
sounds dispirited. "They have significant challenges in driving up the frequency of
the purchases," he says. Noto guesses Webvan will burn $123 million of cash
this quarter and $90 million in each of the next two quarters, thereby exhausting
most of what's left, assuming the marketable securities remain marketable.
There comes a time when financial players make financial decisions, and that
tough time may be nearing for Webvan. As long as former consulting industry
biggie George Shaheen remains CEO of Webvan, that time hasn't arrived. If you
see him leave, it'll be a sign Benchmark Capital, Sequoia Capital, Kleiner,
Softbank and other embarrassed shareholders have decided to bite the bullet. |
