Groupon could find IPO a tough sale

By Clare Baldwin and Alistair Barr

Even after scaling back the issue and cutting the company's valuation in half, the IPO may struggle. Aside from recent regulatory and operational bumps, investors and analysts are troubled by Groupon's business model.

The concept is simple and potentially lucrative: sell a coupon for a local business and take a cut of the proceeds for facilitating the deal. But the market has attracted hundreds of rivals, including well-funded giants such as Google Inc <GOOG.O> and Amazon.com Inc <AMZN.O>. Even Facebook was a Groupon rival for a short while before it shut down its effort.

"My views have not changed, despite the reduced valuation. We still have significant long-term questions about their business model," said Michael Cuggino, who helps manage about $15 billion at Permanent Portfolio Funds in San Francisco.

"They will get a lot of very hard questions from investors focused on their business outlook and profit expectations," Cuggino said, adding he would not be attending the road show and is "nowhere near" investing in Groupon.

Other investors said they were intrigued enough to attend the roadshow, but saw the IPO price as still on the high side.

Groupon plans to sell 30 million shares, or less than a 5 percent stake, at between $16 and $18 each, raising up to $540 million, according to a regulatory filing on Friday.

The midpoint would value Groupon at $10.8 billion, far less than the $20 billion initially expected but still above the $6 billion that Google offered to pay for the company last year.

"Groupon is an impressive business, but it's coming with a pretty rich price tag," said Ryan Jacob, manager of the Jacob Internet Fund, who watched Groupon's roadshow presentation online this morning.

"They're still young enough that the price seems too high to us -- even at the reduced level," Jacob added. "There's impressive growth potential but a lot of risks."

David Berman, a technology and retail specialist at hedge fund firm Durban Capital, said he would attend the roadshow but has reservations about the IPO.

"It's a big part of the puzzle in terms of the future of retail. Whether it's a good model and priced right is another matter," he told Reuters.

"The big issue for me is competition. Are there barriers to entry?" Berman added. "The other question is repeat business. It's one thing to buy a Groupon once and visit the merchant, but are customers coming back again and again?"

NEW BUSINESSES

Rather than address the question of when it might start turning a profit -- a key issue for investors -- Groupon executives in the online version of its roadshow described how they are trying out new businesses, such as travel deals and selling discounted products online.

"We've just started doing these things in the last few months," said Chief Executive Andrew Mason. "We're finding our customers are buying at the same kinds of conversion rates as they do with local. We've been able to translate this audience because we have this trusted brand."

The company launched Groupon Live, a partnership with Live Nation <LYV.N> to offer discounted concert tickets; Groupon Getaways, its travel business; and Groupon Goods, the discounted product market, in the third quarter.

"These are expected to grow and become a larger part of Groupon's overall business," Chief Financial Officer and former Amazon executive Jason Child said. "The success of these new categories greatly increases our market opportunity."

While the Chicago-based company's revenue and sales staff have grown dramatically since its founding in October 2008, it has never been profitable on a net basis. It made a narrower operating loss in the third quarter, after excluding stock-based compensation.

"There are a lot of beat up Internet stocks that are profitable. This one isn't," said a manager of a Bay Area tech-focused investment firm.

He said he would look at Groupon but didn't feel like he had to own it: "A $20 billion valuation is completely ludicrous. Ten billion is still too much."

The investor didn't want to be identified because he planned to meet with Groupon.

(Reporting by Alistair Barr in San Francisco and Clare Baldwin in New York; editing by Carol Bishopric)