Kinnevik AB

STO:KINV B

Earnings Call Transcript 2020-Q3

[Georgi Ganev, Chief Executive Officer]

Good morning, everyone, and welcome to the presentation of Kinnevik's results for the third quarter of 2020. I'm Georgi Ganev, Kinnevik's CEO; and with me today is our CFO, Erika Söderberg Johnson; and our Director of Corporate Communications, Torun Litzén; and our Head of Strategy, Samuel Sjostrom.Before we head into some of the strategic highlights in the quarter, I would like to say that it's evident to all that the coronavirus continues to have a devastating effect on people and economies globally, but at the same time a change in fundamental consumer behaviors and accelerating the shift to digital. We are optimistic that the elevated demand for online is likely to remain even as the effects of the pandemic eventually subsides. The trends we saw in the second quarter have strengthened during the third quarter, demand for digital health care, e-commerce and online food remains elevated, well above that of previous years. On the other end of the spectrum, the travel sector continues to be weighed down by restrictions and remains uncertain when we can expect to return to some kind of normal. Now on Page 3, we have summarized the key strategic highlights during the quarter. Investment activity has remained vibrant with the announced merger between Livongo and Teladoc Health. We also invested in 2 new business in our focus sectors. In our efforts to continue pruning our portfolio and focus our resources, I'm also pleased to say that we have divested our shareholding in Home24 and completed our exit from Qliro Group. Our net asset value was up 23% in the quarter when adding back dividend paid of SEK 1.9 billion. This was driven by exceptionally strong share price performance in Zalando and Livongo as well as broad-based revaluations in our private portfolio. In just a short while, Erika will take you through the development of our NAV in more detail as well as the valuations of our unlisted companies. Our strong balance sheet puts us in a very good position to execute on our investment strategy, and we continue to identify and assess a number of exciting opportunities.Now on Page 4, we have provided you with some details on the announced merger between Livongo and Teladoc. We believe that the merger makes strong strategic sense. It joins 2 highly complementary companies, combining Teladoc's reach and large customer base with Livongo's robust programs for treating chronic conditions. This will create the largest consumer-centric virtual care platform for a full spectrum of health needs, and the merger will also create significant synergies, and we're excited to become the second largest institutional shareholder in the combined new company.We first invested in Livongo back in 2017 as part of our health care investment strategy. And since then, we have led several financing rounds in the company. And so far, we have generated an unrealized return of around 11x our invested capital into the company and around 6x into the broader sector. The proposed transaction truly validates our strategy. And at the close of the third quarter, the value of our stake in Livongo represents an unrealized return of 228%. When the merger has been completed, Kinnevik will own a 4.5% stake in the combined company and receive SEK 1.3 billion in cash and the merger is expected to close in the fourth quarter of 2020. Now moving on to our investment in Common on Slide 5. Common is a residential brand and tech-enabled managed marketplace. They combine technology with a unique operating platform that delivers a better experience for renters, while also generating a high return for the real estate owners. Rental costs are often the largest share of consumer wallets, yet the rental market has seen limited innovation and technology investment for many years. Real estate owners choose Common as they offer a hassle-free experience, including a virtual apartment tours, standardized furniture and all-inclusive flexible rentals. Renters get to keep the good parts of cold living while Common takes care of the annoyances and run day-to-day operations without itself assuming lease risk. Our investment in Common is part of our strategy to broaden our consumer services portfolio towards business models that reflect broader consumer trends. It also fits perfectly into our vision of providing more and better choice to the consumer.On Page 6 is an overview of our second new investment in this quarter, Joint Academy. This is our first investment in the digital health care space in the Nordics. Joint Academy was founded by a father-and-son team, where the father is a Professor and the Founder of what is considered the Swedish gold standard for treatment of joint pain. The son digitalized the treatment, making it globally scalable and much more cost efficient. Around 80% of global health care costs stem from 15 chronic diseases and chronic joint paint is the fifth most common. As such, Joint Academy addresses one of the largest cost drivers in the global health care system. They do this by digitalizing a proven clinical method that has been developed over many years, generating superior outcomes. And with our strong belief in the power of digital care to manage chronic conditions and improve patients' lives, this investment sits perfectly at the intersection of our Nordic venture and international health care strategies.On Page 7, we have provided some more details on the performance of our large listed companies. E-commerce has seen a tremendous rebound in the last few months, driven by faster-than-expected recovery in consumer demand and an overall increase in demand for online. Last week, Zalando raised its full year 2020 outlook on the back of exceptionally strong and profitable growth in the third quarter. And Tele2 has remained stable through 2020 with less exposure to expensive pay TV sports rights than peers. Livongo has continued its stellar operational performance during the quarter as the adoption of digital health becomes more widespread.Now looking at our younger growth portfolio, we have highlighted a few of our companies on the next page, moving to Page 8. Our online grocery companies, Kolonial and MatHem, have seen a significant increase in demand and inflow of new customers due to the accelerated shift to digital. Going forward, customer retention and engagement will be key in retaining these new customer groups. So far, these customers have shown similar behaviors in terms of retention and purchase frequency as pre-pandemic customers, and this makes us optimistic but the elevated demand is likely to last in the longer term.Similar to Zalando, Global Fashion Group also upgraded its full year guidance for 2020 on the back of strong growth and profitability. The company is now expecting Q3 to be the second consecutive quarter with positive cash flow and profitability with respect to the adjusted EBITDA. They're also expecting to approach breakeven on adjusted EBITDA for the full year of 2020. I would now like to hand over to Erika to go through the valuations of our unlisted assets and our financial position, starting on Page 9.

[Erika Söderberg Johnson, Chief Financial Officer]

Thank you, Georgi. As you mentioned, the trends we started to see in the second quarter have strengthened during the third quarter. Our large listed companies have continued to trade very strongly in the quarter, supporting our net asset value development. Furthermore, we have reassessed the fair value of a number of our private companies due to market and company developments. The fair value of our private portfolio was written up by just under SEK 1 billion or 7% during the quarter. With net investments of just over SEK 700 million, the total value increase of the private portfolio amounted to SEK 1.7 billion.Looking at the development of our net asset value during the quarter, we believe our portfolio can largely be divided into 3 categories of companies. In the first category are our fashion e-commerce companies, Zalando and Global Fashion Group. They continue to rally in the quarter with continued consumer and investor interest in digital services, fueling multiple expansion well above pre-COVID levels. Zalando's share price was up 27% during the quarter and GFG was up over 90%.In the second category are our more resilient businesses. These include Tele2, our health care companies and our online food and last mile businesses. Tele2 has remained defensive during the quarter, up 2%, and Livongo has continued its stellar performance with a share price appreciation of almost 80%. During the quarter, the IPO of Oak Street Health provided a strong indication of investors' interest in value-based care delivery operators, such as VillageMD and Cityblock. Also, operators of virtual health and telemedicine services continue to be valued with material premiums compared to in-person primary care peers.Valuing our businesses in these sectors, we continue to focus on achieved financial performance in assessing our fair values. VillageMD continues to perform strongly, and we have written up the value of our stake by almost SEK 1.1 billion or 45%, whereof SEK 232 million stems from our investment in early July. We recently announced -- the recently announced partnership with Walgreens and its impact on the future outlook for VillageMD provides continued support for multiple expansion, although the company is still valued at a material discount to peers. We have written up our stake in Cityblock by 34%, driven by the company's performance as our trailing revenue multiple is unchanged from the previous quarter. The fair value of Babylon is unchanged in the quarter, say, for some currency headwinds. Our valuation is primarily based on a set of specific operational future milestones. So far, the company is on track to deliver on these milestones, effectively growing into its valuation, but we are expecting to have better visibility during the fourth quarter. As and when we get further visibility on these milestones, we can reassess our fair value. Our valuation corresponds to approximately 21x Babylon's forecasted 2020 revenues. A slight premium to the average of a peer group of disruptive health care and health care IT companies, including Teladoc, which have seen moderately positive trading in the quarter. Our online food companies continue to enjoy elevated growth rates even as the initial COVID-driven peak in customer intake and order values is behind us. We have written up MatHem by 8% and Kolonial by 11% in the quarter, reflecting the company's strong performance as multiples are unchanged.In the third category are our travel, financial services and emerging markets assets. We wrote down the value of Omio by 13%. But adding our convertible investment in the company, the fair value of our investment was up 11% in the quarter. TravelPerk continues to face challenges, but is performing at a strong level considering the weakness of the underlying market. In light of the write-down in the previous quarter, we therefore kept our valuation of TravelPerk largely flat.All in all, our net asset value amounted to SEK 107.9 billion at the end of September. That's SEK 388 per share and represents an increase in the third quarter of SEK 20.3 billion or 23% when adding back dividends paid. Our share price appreciated by almost 52% compared to NASDAQ trading up 10% and the OMXS30 up 7%. We are, of course, as always, happy to answer any questions you may have on our valuations when we move to Q&As. But I also want to highlight pages 23 to 25 in the quarterly report, where we have elaborated more on our valuation assessments and methodologies used.Finally, with yesterday's closing prices of our listed assets, our net asset value was SEK 112.7 billion, up 4% so far this month. This was largely driven by continued strong trading in Global Fashion Group and Zalando.Now please turn to Page 10 for an update on our financial position. During the quarter, we made net investments of SEK 0.5 billion and paid dividend of SEK 1.9 billion to our shareholders, taking our net cash position to SEK 3 billion. Adjusting for the dividend received from Tele2 in the beginning of October, our net cash position amounted to SEK 4.2 billion. And pro forma also for the SEK 1.3 billion in cash consideration expected after the close of the Livongo, Teladoc merger later on in Q4, our cash position at the end of Q3 would have amounted to SEK 5.5 billion. In summary, we have a very strong financial position, which gives us full flexibility to execute on our investment strategy.With that, I would like to hand back over to Georgi for a comment on our key priorities going forward, on Page 11.

[Georgi Ganev, Chief Executive Officer]

Thank you, Erika. We remain firmly focused, dynamically reallocating capital and pivot our portfolio towards a higher proportion of growth companies. As we have proven this quarter, we continue to strengthen the balance in our portfolio across sectors, stages and maturities. We also remain prudent by exiting companies where we believe our tenure as owners is over.The world is still deeply impacted by the pandemic. And I am truly humbled by the hard work and dedication shown by all our companies. They have been flexible and really stretch their capabilities to be able to serve their customers with more and better choice. As always, I'm also very grateful for the continued strong support from our shareholders. Before we move on to the Q&A, I would like to mention that we are planning to host a digital Capital Markets Day later this fall and we will get back to you with more details on the date and program.Now we are ready to answer your questions. So operator, please open up for Q&A.

[Operator]

[Operator Instructions] Our first question comes from Derek Laliberte from ABG.

[Derek Laliberte, Research Analyst]

I had a question on Kolonial. There was news out that the company is expanding its or increasing its capacity and building a new warehouse. So I was wondering if this implies any funding needs for the company.

[Georgi Ganev, Chief Executive Officer]

Derek, thank you for that question. We're currently in the dialogue with the Kolonial regarding funding needs. It's nothing specified yet, but we are truly supportive of that company. Again, first of all, we have seen efficiency increase materially and we have also seen a great scalability during the pandemic. So kind of our thesis around making money on online grocery is proven. We also see that there is more opportunities for Kolonial, both in Norway but probably with their technology also elsewhere. So we are very supportive, but we have no kind of news on exactly what it means in terms of funding, but we are in a dialogue with the company on that.

[Derek Laliberte, Research Analyst]

Okay. Exciting. Very clear. And then I have a question on -- if you could just elaborate a bit on the milestones in the Babylon's that you're referencing in connection with the valuation and you have this 21x sales multiple. But just what these milestones are sort of approximately? And how they're connected to your sort of assessment of the valuation?

[Georgi Ganev, Chief Executive Officer]

Yes. So let me then start with the milestones from a commercial standpoint, and I will hand over to Samuel to go a bit more deep at how it impacts our valuation and how we think about it going forward. So I mean when we invested in Babylon, it was on the back of they being able to position their B2B offers, basically how they can sell their services to other large players in a very positive way. The first contract, as you perhaps know, was the Prudential contract in Asia and the second large was the Centene contract in the U.S. So Babylon, they have this more kind of D2C service with NHS in the U.K., but in U.S., in Asia, we're primarily working with partners. And the Centene contract was a large frame agreement with one of the largest hospital group in the U.S. So to scale with that customer across United States was key for us when we put the valuation mark at the last fundraise. That is something that we're very excited about. And as we say in the report, we also see that the company is performing according to those milestones, but it's really about the development of the Centene contract.So Samuel, if you would like to explain why we're using that as a basis for our evaluation.

[Samuel Sjostrom, Head of Strategy]

Sure. Derek, so as you know and as we've pointed out in the past, Babylon is a sort of hyper-growth business aiming to grow by 4x this year to $80 million and another 5x next year. And with the company growing at that pace, forecasting is very tricky and, therefore, also fairly volatile. That's sort of why we've elected to focus on these milestones. I think Georgi covered them fairly well. I can just sort of sum up that, in short, these milestones relate to the degree to which Babylon is delivering on a handful of key contracts, including the ones Georgi mentioned, and that they are recognizing revenues at the pace and at the magnitude that we believe justifies our current mark. I could add that if Babylon reaches their 2020 ambitions, I believe we can safely say that they will also have reached these milestones, which sort of, all else equal, would have a positive effect on our fair value in coming quarters.

[Derek Laliberte, Research Analyst]

Okay. Interesting. That sounds very reasonable. And the funding standards of the company, where are we there? And also from your point of view, what would be the benefits from this company being public potentially going forward?

[Georgi Ganev, Chief Executive Officer]

I mean, I think it's clear to all of us that the multiples in the public markets, they are quite high right now in this sector. So of course, a public -- the company being public would mean that the company would have the currency to continue to expand and also to expand inorganically. So in terms of M&A and consolidation, that could be very interesting. But we don't see it as a prerequisite for this company to grow. There is great demand for this type of exposures from investors, both in the private and public markets. And right now, with the current trend that we see in Babylon and the team's ability to expand into the U.S. with these large partners, we feel comfortable that there will be great demand, both in private and public markets. But having said that, in the public market, the multiples are high and it will give them the strong currency to acquire companies.

[Derek Laliberte, Research Analyst]

That's very clear. And just finally, on this new investment in Common within consumer services, I think consumer services, obviously, is a quite wide sector, and also that's sort of evident by all the investments that you have in the sector. I mean, can you -- obviously, this was within real estate, but are there any subsectors or segments in consumer services that you are specifically targeting for any potential new investments additionally?

[Georgi Ganev, Chief Executive Officer]

I think the answer is that within consumer services we are looking at quite many subsectors, to be honest, but we try to not go too deep into the sector. So if we look at Common as an example, they're not kind of real estate investors. So they are providing a managed marketplace as a layer in between the end customer and the property owners. And that's where we understand the business models from other marketplace solutions. And with that experience that we have scaling such a marketplace, we can actually be an active owner in companies like Common, for instance. I mean, another sector we looked into that expect -- or sees a lot of headwind today is the travel sector. Same thing there. We look at marketplaces within the travel sector with Omio and TravelPerk, and we can apply the same type of models and metrics we have seen, for instance, in fashion and e-com into those sectors. So what you could expect is that we will be looking at a quite broad portfolio of subsectors but try to stay relatively kind of light in a light asset way, if you will.

[Operator]

Any our next question comes from Joachim Gunell from DNB.

[Joachim Gunell, Junior Analyst]

So perhaps to follow-up where we left. I mean, it's very interesting with them to hear into Common. Where do you believe, Georgi, that Kinnevik are the best place to add value to a company like Common, given that this is your first debt on property tech?

[Georgi Ganev, Chief Executive Officer]

I think -- as I said earlier, I think our consumer angle is extremely important to have right in these companies. If I look at Livongo as another example, when we came into Livongo, we were not the experts of health care, but we understood it from the consumer standpoint. And within this space, at that time in 2017, many of the companies were focusing on the partners with other large health care providers and not towards kind of the member, the end user of their services. So that's the same thing with Common. We take the customers' perspective, how we can make a better solution for the customers and, of course, partner up with someone understand the ecosystem of real estate. So that's the main contributor.We also have, I think, by that, the understanding of how to scale efficiency when it comes to customer acquisition. So what are the unique kind of unit economics for a company that is successful and how can we use that marketing and customer acquisition knowledge in a company like Common. And thirdly, again, being a long-term partner, these entrepreneurs, often serial entrepreneurs that chooses to cooperate and partner up with Kinnevik, they are looking for a long-term investor. Because a business like Common, we don't expect that to have a immediate hockey stick growth in the next quarter, but rather build up a very solid business over a longer period of time. And that also fits squarely with kind of the DNA and the methodology that we have at Kinnevik.

[Joachim Gunell, Junior Analyst]

I mean, that's very helpful, Georgi. Coming back to the topic we discussed on Babylon, but most for Babylon. You commented earlier this year that, I mean, a potential option going forward for VillageMD is an eventual IPO. But given now how the U.S. market seems to reward this type of value-based care providers, is that also an option for Cityblock? Where are they in terms of maturity? Any color there would be helpful.

[Georgi Ganev, Chief Executive Officer]

Yes. I think when it comes to the health care portfolio, even though it's above 20% now as the kind of the share of our entire portfolio, we have to remember that we have those 22% spread across different kind of subsectors within health care and also maturities. So the whole point with Cityblock versus VillageMD is that Village is a more mature company and they are larger. So I think in terms of kind of a public listing, Village is probably earlier out than a company like Cityblock. But having said that, we believe that the models that both these companies represent fits very well in the public market, and there is a clear demand for it. And going back again to what we said earlier in the presentation, when Erika went through the valuations, we still see a gap between the multiple that we use for Village and the public traded peers. And we have no other plan than to close that gap over time as the company is -- continue to performing and potentially come closer to an IPO.

[Joachim Gunell, Junior Analyst]

Very clear. And then just final for me. I mean you've really increased the transparency here regarding operational KPIs and some financial debt for some of your companies here, and that has really helped, I mean, the investment community understand the potential. We've seen that in the shares I believe as in this year. Are there any companies here that we should expect more transparency from going forward in the coming year?

[Georgi Ganev, Chief Executive Officer]

I think it's difficult to say because as we are not kind of in a controlled situation of any of our companies, it's a discussion between the other shareholders and, of course, the management. And typically, the reason for not sharing is that, for competitive reasons, these companies would like to operate in more in a quiet environment. So I think it's difficult for us to commit to that. Our intention and ambition is actually to continue to be more transparent, especially for those companies that are more mature and come closer to a potential IPO or a trade sale.

[Operator]

Our next question comes from Lena Osterberg from Carnegie.

[Lena Osterberg]

I'm sorry, I'm coming with boring questions here. My first one is on MatHem. Kolonial had a very strong growth in the quarter. But if I compare MatHem to its peers, we had I guess online sales up 148%, 128% in Q2. And I think if we look at LTM, it goes up 65%, actually it is up 61%. So why is the company underperforming so sharply? I know that they've had some problems, but it's a wide difference. And when do you think the company will be equipped to deal with higher demand? And do you think it's too late for? Did they miss out on this COVID boom? Yes, I have some more, but go, start with that.

[Georgi Ganev, Chief Executive Officer]

Is it okay to answer that question first, Lena?

[Lena Osterberg]

Yes, yes, please do.

[Georgi Ganev, Chief Executive Officer]

I think the first important point here to mention is that we're looking at the total growth online from these players, and they include click and collect. So what you need to ask them is how was the share of click and collect growth, which means that you order online but you, as a customer, go and pick up the groceries in the store. Often, these groceries are then picked in the store as well, which is very different from the pure online growth that we see at Kolonial and MatHem that has no other options than order online and deliver to home. So that's the first important distinction. The second question is that how much is this a transition from their existing customers going online rather than capturing new customers from competitors? So that's the second question, which you have to look at the overall growth of these companies. And the third parameter here is that the difference between MatHem and Kolonial is the automated warehouse. So whereas Kolonial has been able to scale and to kind of deliver on that surge in demand we saw, especially in the first couple of months in the pandemic, that has not been the same situation for MatHem. But having said that, MatHem opened up a second warehouse, taking over [indiscernible] premises, and they have scaled and delivered growth early in the pandemic around 50%. So if you look at those things, you will compare more kind of apple to apples than the figures that you just stated.Then I think, lastly, we should also remember that the strategy for MatHem is to focus on the larger urban areas in Sweden, so Stockholm with kind of Malardalen as an area. So Uppsala, Västerås, et cetera, around, right? And then you have the Gothenburg area and Malmö area, and that covers roughly 50% of Swedish population. So that's also a difference. And just before the pandemic, Axfood announced that [indiscernible] actually withdrew their offer in the Malmö region. So they do not offer that service anymore through [indiscernible]. They're going all-in with Village, with the majority of the growth is click and collect.

[Lena Osterberg]

Can I ask you, wouldn't click and collect grow less in the pandemic? Wouldn't the pure online version have a faster growth because people would not want to go to the stores?

[Georgi Ganev, Chief Executive Officer]

That's a philosophical question. The fact tells me that click and collect grows faster. And I think the answer there is that those models are -- that model is pushed by the incumbent. Because if you are a incumbent, Lena, you have a large store chain, your value network is already equipped for you to actually bring out the groceries to the stores. There you have people working picking in the stores. And if you don't have an automated warehouse tailored to e-com, you want to use that network. So if you have a lot of customers, you're pushing that model. It's not what the customer wants. We believe that, over time, what the consumer wants is actually to order online and get the food delivered to the home. That will save around 90 minutes per week. And I think that's the key thing here that we are betting on and what we hopefully will see over time.

[Lena Osterberg]

But do you -- did them -- let me phrase it this way, do you fear that they have missed this, if COVID has been an opportunity -- for a few people it has been, but in this sector has been. So do you fear that they missed this opportunity because of the lack of automation and the difficulty just to scale up?

[Georgi Ganev, Chief Executive Officer]

Not at all. I would argue that MatHem is growing within their market share on pure online. So they have captured market share in that segment. But again, you need to take out the pure online, so deliver to home, and you need to look at the regions where they are active. If you're doing that compared to the incumbents, I would argue that MatHem is taking market share during the pandemic. So it's the contrary.

[Lena Osterberg]

Yes. I'm sorry, I'm going to continue to focus on the less performing assets because everybody else has asked about the great ones already. So I'm just trying to understand Karma, why is that growth coming down? If you could just maybe say something about that. And also the Budbee, which I would assume would also be a beneficiary from more online sales during the pandemic, why is that seasonality? And why is the sales trending down there?

[Georgi Ganev, Chief Executive Officer]

If we look at Karma first, I mean, I think we have to mention that, that's a very small share, right, of our portfolio. So I appreciate that you asked the question. It's around SEK 40 million and 0.004% of the portfolio. But nevertheless, it's not growing as fast because of the restaurant businesses during the pandemic had also had some struggles, right? The cafes, et cetera, with not as many people visiting them. So it has more kind of linked to the restaurant business during COVID and the cafes, the delis. And when it comes to Budbee, there we see a great demand for their services. I think based on 2 things, the general e-commerce trend is driving the need for delivery services. And then, of course, with the preparation by many retailers, with the fact that Amazon will launch in Sweden, they need to have a very good alternative. So if you assume that Amazon will take a significant part of the e-com market, but of course, not 100% of it, all the rest will have to have delivery options that is actually in line with what Amazon can offer, right? So a lot of e-tailers have upgraded their offering on the last mile delivery option, which has resulted in Budbee growing this fast. But maybe I missed your question regarding Budbee.

[Lena Osterberg]

It was more that the trend is going down, I thought, when I looked at it -- the graph just that you had, which showed the revenues for deliveries.

[Georgi Ganev, Chief Executive Officer]

Okay. It's a number -- yes, it's a number of new merchants, sorry.

[Lena Osterberg]

There was no new merchants, yes.

[Georgi Ganev, Chief Executive Officer]

Yes, yes. So that is not the trend in deliveries. It is signed up merchants and that was boosted during the pandemic, where actually a lot of merchants had to actually add this as an option in order to capture e-commerce sales. So it's basically a number of merchants trend rather than a number of deliveries.

[Lena Osterberg]

Okay. But could you say something, the number of deliveries is [indiscernible] sharply.

[Georgi Ganev, Chief Executive Officer]

Yes, of course. So I mean if we look at the speed that they're growing, they've tripled the revenues in 2019 to SEK 150 million and surplus that level already by the Q2 this year. So by the end of second quarter this year, they have surpassed the growth in 2019 and then 2019 growth was tripled the year before. So we're talking about several x in growth per year.

[Operator]

Our next question comes from Stefan Wård from Pareto Securities.

[Stefan Wård, Research Analyst]

I have a question about the portfolio construction in a broader sense. You have a very strong balance sheet now with a pro forma net cash of SEK 5.5 billion, total liquidity around SEK 15 billion. After the Teladoc or Livongo divestment, you will have a fairly liquid asset that is currently valued around SEK 13 billion. So it seems like you have a lot of financial flexibility. Adding to that, the performance of Zalando is clearly satisfying and they're being free cash flow positive already in 2020, and I expect that free cash flow generation is probably going to expand over the next few years that the company continues to expand its business. And also, Zalando has this huge cash position of SEK 2.4 billion. So that perspective, hasn't Tele2 sort of played out it's role a bit for Kinnevik? It's a slow-growing assets. We don't really need that dividend profitability with your own balance sheet. By reducing Tele2, you would clearly improve the potential for generating returns in Kinnevik. Could you a bit of your view on reasoning?

[Georgi Ganev, Chief Executive Officer]

Stefan, I would say, first of all, even though Zalando has a very strong cash position, especially after a convertible, we support growth. We believe that Zalando can do a lot more on growth. They have a great and unique position in helping brands to become more successful both in the kind of partner program and also in their wholesale model. And the kind of strategy that they have had is to grow organically and being kind of also prudent in launching new concepts. We believe and support that Zalando will continue to do that maybe at an even higher pace going forward, given that they have such a strong position both in terms of cash and also in the market. So we don't foresee or we don't expect any dividend from Zalando in the near term. And I think you, as an investor in Zalando, you should reason the same way. That is, of course, very different from Tele2, which is a yield player. I've said it before, I think that Tele2 can do much more, both in capturing synergies but also using this position that they have now with fixed mobile convergence in the market and deliver good services that will take them back to growth. We have said before, and we can repeat again, that Tele2 is needed to fuel our transformation as a company. And it also creates this counterweight in the portfolio because in bad times, when multiples go down instead of up, you have this more kind of defensive, stable asset that could provide yield. And that, of course, is very comfortable for us as a growth investor. So I think time will tell going forward what would happen. But right now, we don't have any other plans than so.

[Operator]

Our next question comes from Nizla Naizer from Deutsche Bank.

[Fathima-Nizla Naizer]

Great. Three questions from my end. The first is on, I guess, fashion e-commerce and Zalando and Global Fashion Group. In your view, from what you've seen on the ground, do you think that elevated demand for e-commerce and that structural shift would continue more aggressively going forward now that people have gotten more used to the idea of online fashion and online purchasing rather during the time of the pandemic? That's question one. And two, Zalando with its rally is, again, a very sizable part of your portfolio. Are you happy with the size of your exposure or do you think that at some point some adjustments would needed if this exposure to Zalando continues to increase on the back of their own strong performance? And lastly, just given that e-commerce has done so well, curious to understand why you disposed your stake in Home24, which I guess would have been exposed to the same sort of drivers. Some color there would be great.

[Georgi Ganev, Chief Executive Officer]

Thank you, Nizla. So I think on the general trends, first of all, we definitely believe that the elevated growth that we've seen will continue and continue at a higher pace than pre-pandemic. And why is that? Firstly is exactly as you say, people that has learned how to shop online and especially among new customer groups, so elderly people, et cetera, that were maybe not so used to shop online have realized that's a good way of shopping and convenient way of shopping. But there's also another reason and that actually is that the off-line player, the traditional players have had no options than to accelerate their online strategy, right? So we cannot be protective anymore during a lockdown. So by having incumbents pushing the online channel, that will also help the whole market, the whole segment to grow. And if you're well positioned as the #1 or #2 in a region, you will benefit from that tailwind. So we are optimistic that this change and this accelerated consumer behavior will actually be positive for our companies in this space going forward as well. When it comes to Home24 and some other smaller e-com players that we've had, we've taken the decision to prune the portfolio so we can focus on some of the larger assets or the assets where we see potential for them to actually move the needle for Kinnevik at large. But there's also some other differences. I would say, between fashion and selling sofas online is a big difference. Difference in complexity of delivery, it requires 2-man handling, it requires a different type of logistic chain, which is, of course, solvable, and we see great progress in certain companies as well, but it's a different gameplay than what we see in the kind of more asset-light marketplace solutions and within fashion specifically. Therefore, we're taking both a kind of strategic decision based on that but also because of our need to focus. Maybe did I miss something around -- you can fill in Samuel.Exactly, the portfolio concentration, sorry. No, I think it is definitely a luxury problem. It's a problem, but it's a luxury that we have companies in the portfolio right now performing really, really strong. And I have no further comments on that. I mean, as you know, we have done 2 sell-downs in Zalando. We have recouped the capital that we have invested. And nevertheless, our stake today is worth more than before that sell-down. And that, I think is a luxury, and we are humbled and we are very, very pleased to have a company with that type of performance in our portfolio.

[Operator]

Our next question comes from Johan Sjöberg from Danske Bank.

[Johan Sjöberg, Analyst]

I apologize if you have answered this question before, but I want to come back to MatHem and talk a little bit about the valuation of that. Do I interpret right when I look at Page #23 that you have a 25% discount on MatHem versus peers and you refer that to that it's less mature than the peer group? Is that the way you -- is that correct?

[Samuel Sjostrom, Head of Strategy]

That's correct.

[Johan Sjöberg, Analyst]

Is this the first time -- because I've been looking at previous results, so you have not used this 25%. Is this the first time you do that? Or is that a new valuation method you apply now?

[Samuel Sjostrom, Head of Strategy]

The method is the same. The discount has expanded slightly. That's to reflect the differences in business model because the peer set that we benchmark MatHem and Kolonial against are not online grocers. There are no pure-play listed online grocers available to compare our businesses to. As you know, Ocado has a different model. So we're trying to reflect a lot of things in that discount, but that's one of them.

[Johan Sjöberg, Analyst]

Okay. And in terms of profitability during the quarter. There were some I don't know if it was a slippage of your tongue earlier, last quarter, Georgi from your side here. But if I remember correctly, you were profitable, I think it was in Kolonial during the first month of the pandemic. Is that -- can you talk a little bit about how -- about the profitability in these 2 names right now?

[Georgi Ganev, Chief Executive Officer]

Yes, that's correct. So what we saw with increased demand that they had the ability to capture because of their automated warehouse and more importantly, keep their efficiency even though they had to add a lot of kind of employees on weekends and so forth, they still managed to deliver a very high efficiency. So units per hour as you measure. And that means that we can now kind of see that the model works, and it's possible to make money selling food online. That has not been the case for MatHem for obvious reasons. So with a manual warehouse that you have also outgrown more or less in terms of efficiency improvements, you -- the main objective and the vision was to capture as much growth as possible. But with a scalability that cannot be there until we have the automated warehouse that we will have in 2022, we'll have to kind of invest in order to capture market share.

[Johan Sjöberg, Analyst]

So was Kolonial profitable in Q2 -- sorry, in Q3?

[Georgi Ganev, Chief Executive Officer]

I don't want to comment on full quarters. But since we are supporting growth, we have actually increased our marketing spend, again, after the pandemic in order to grow as fast as possible rather than becoming profitable. So we use that couple of months to verify the model, and if you will test the scalability of the automated warehouse, that is enough for us. So our thesis has been proven, and therefore, we can go back to aggressive growth.

[Johan Sjöberg, Analyst]

Okay. Can I ask you also about Babylon and also VillageMD and looking at the valuation of these names? You say that it will take some gradual -- or it will -- there's a big discount right now, but you -- there are some time -- or there was something which you want to achieve before you apply full market valuation sort of take a look at. What sort of time frame would you say that you will you're looking for before we will see that your -- like your market valuation or full peer group valuation on these names in your own books?

[Samuel Sjostrom, Head of Strategy]

Right. So if we start off with Village and City that sort of share comparables, I mean I think I can give a fairly simple answer to why our market is where it is and that we're not giving you this massive re-rating this quarter. And that's simply because in both companies, we had fairly material transactions in early July at Village and end of June at Cityblock. And we need to relate to and sort of respect the marks that were established in those transactions, which is why we're not sort of merely taking Oak Street Health's revenue multiple and slapping it on our businesses and calling it a day. It's more complex than that. Let's see how Oak Street trades. It was IPO-ed sort of 2 months ago, free float is fairly limited, but provided our businesses continues to perform and markets continues to be supportive, we do not see sort of any reason to why we shouldn't be able to narrow this gap in a consistent way over the coming quarters.

[Johan Sjöberg, Analyst]

Okay. Final question for me. It's about Livongo and also Teladoc merger. Yes, you will be the second largest institutional owner in the new company. But still, you will have an ownership stake in the company, which is clearly below what you are aiming for when in terms of your own stakes. How do you reason about your future ownership in Teladoc, Livongo? Are you fully committed long-term owners? Are you -- how -- what is your long-term ambitions here since you have your own -- your investment criteria also?

[Georgi Ganev, Chief Executive Officer]

First of all, we're always committed owners until we're not. So I guess that, of course, we believe in the company's future. And as we have said, we believe in significant synergies here, not to say least on the cross-selling opportunities between the large customer base of Teladoc being able to offer Livongo services. So we're very positive around this merger. And therefore, we would like to capture those synergies. What that means for our ownership going forward, I think it's something I cannot comment today. But maybe one thing regarding the 4.5%. As we said before, I mean, we have an ambition, and we're aiming for 15% to 25%. But what's more important, we say that we would like to influence outcomes, right? We're not necessarily looking for control. And in this case, again, as you say, we're the second largest institutional shareholders, we have Board representation, and we also have, to say, a very close relationship with other directors, such as Glen Tullman, the founder and the former CEO of Livongo. So we believe that we can actually manage the outcome of that company in a fairly good way. And it's not that we are running our companies in an excel spreadsheet every quarter, and then that spreadsheet decides what company to sell because of these parameters. So now we ended up with this merger because we believe it makes strategic sense. And one consequence of that is that our ownership goes down for plus -- from plus 10% to sub 5%. That's what it is. We are again very happy. We're humble for what we've seen in this sector, but we are mostly very excited about being owners of Teladoc.

[Johan Sjöberg, Analyst]

It's an amazing story, absolutely. And in terms of your ownership in Babylon, you don't see any -- these 2 coming -- becoming competitors now when Babylon is entering the U.S. market?

[Georgi Ganev, Chief Executive Officer]

I think that's a relevant question. I mean, over time, obviously, there will be more consolidations and I think more competitiveness between some companies. We -- as an investors, we believe we have the luxury to invest in several companies once again spread across geographies, stages and maturities and so forth. So that's a way for us to, if you will, hedge in the sector and capture as much of the positive outcome as possible. What's important to, I think, remember is that if you think about 2 kind of mega trends within the health care sector today, one is the digitalizations of virtual care and the other trend is value-based care. And we have companies exposed in either kind of the virtual care piece, which is more Teladoc, and we have companies more exposed into value-based care, such as VillageMD and Cityblock. What Babylon is doing is that they are exposed to both of these trends. So they have the position to become one of the larger value-based care providers, but on a virtual basis, so using virtual care as the way to become more efficient as they take aboard more risks with their contracts that they are now launching with Prudentials and Centene. So we think that's a very exciting story in itself. But of course, it entails some execution risk as it does. And therefore, that company is, I would say, a bit earlier in maturity compared to Village or Teladoc.

[Operator]

[Operator Instructions] Our next question comes from Ramil Koria from SEB.

[Ramil Koria, Analyst]

You've gotten a lot of great questions during this call. But let me just try to pick your brains on a topic I found particularly interesting being narrowing the gap versus public peers in terms of valuation. A very high level one, but could there be a risk in narrowing the gap too soon, which would sort of mean that if the company decides to remain private and raise new funds that -- so there will be a demand from the company side to reflect public valuations, if you've decided to indeed revalue the company according to public valuations? Does that even make sense? But the question I guess being that, is there an implicit risk in revising valuations too quickly if the company has funding needs and has no intention to go public anytime soon?

[Georgi Ganev, Chief Executive Officer]

Ramil, no, I think -- I mean, at the end of the day, when a company is raising money, most investors are looking at the fundamentals. So the operational performance of that company and, of course, what is the alternative of investment -- investing. So it's difficult for Kinnevik as one of the owners to kind of control that next mark by not being aggressive in our valuations. So I think it's -- as you say, that correlation is not really there. But there's, of course, another risk in terms of our valuations, but maybe you want to elaborate further how we think about closing that gap, Samuel.

[Samuel Sjostrom, Head of Strategy]

Sure. I mean, if we take a step back, what's going to drive the value in these businesses is not sort of arbitrage on multiple, it's performance and it's organic growth. In terms of narrowing the gap, there's a time factor and there is a comparative factor in play here. I mentioned that in both companies, we've had transactions, just sort of 3-ish months ago, and that is a very heavy reference point when we assess our fair values. So narrowing this gap sort of depends on how the comps perform and how our businesses perform. So it's tricky to give you an estimate. Is there a risk? Yes, there is risk. Considering the levels of multiples we're seeing in the market, I'd argue, we have less multiple risk on our balance sheet because as you've noticed this quarter what's driving value in this quarter in the private portfolio but also to a certain extent in the public portfolio is performance and not expanding multiples.

[Ramil Koria, Analyst]

All right. That's clear. And then circling back to one of the first questions you got during the call on potential funding needs in Kolonial, and Georgi you mentioned that it could be for sort of laying the map in terms of distribution capabilities, but also to potentially venture outside of Norway. Is that a discussion you're currently having in this funding round, so to say, or could it be that the venturing outside of Norway is something for distant future, so to say?

[Georgi Ganev, Chief Executive Officer]

No, I don't want to go into the details of the company's strategy because it's for them to announce that first. But of course, we have looked at this case as such from both a geographical standpoint and growing more in Norway. As we've said many times, we're super impressed by the execution by the management team and also how they delivered on this automation. So that in itself makes us excited to look at various alternatives. And of course, those alternatives will also require different type of funding needs. So first, we have to decide that or the company needs to decide that together with the Board and investors. And after that, we will determine how much funding is needed.

[Ramil Koria, Analyst]

Understood. And then a final one from my side on the Capital Markets Day. What do you want to convey during that, Georgi and team, of course?

[Georgi Ganev, Chief Executive Officer]

That's the perfect teaser by saying that you need to visit that Capital Markets Day. But obviously, I mean, jokes aside, I think for us it's a combination of a follow-up from what we've said last year and also to give you some kind of figures on that, mostly what you know, but also to go through it from our perspective, invite a few companies to tell you about their stories and what they have experienced. But of course, I should lie if I say that I wish you to find a good trigger as well to buy Kinnevik for the continued story. So that's something that we hope we can deliver on.

[Operator]

Our next question comes from Stefan Wård from Pareto Securities.

[Stefan Wård, Research Analyst]

One more question for me. I just want to get some clarification on the balance sheet strength with this net cash position of SEK 5.5 billion pro forma and very strong liquidity on top of the net cash position. How will you steer that? I mean, it seems like you cover a lot of investment activity if we look back on the past few years. With this position, is -- do you have -- can you give us some guidance or principles on how long you can stay with such a substantial net cash position before sort of distributing to shareholders or employing it in new investment?

[Erika Söderberg Johnson, Chief Financial Officer]

Yes. Stefan, again. Wellwe are within our sort of target where we want to be plus/minus. And as we said earlier during the call, we continue to see lots of interesting investment opportunities that we continue to evaluate. So we have good faith in that we can put that money into good work.

[Operator]

I see no further questions. So I'll hand back to speakers for any other remarks.

[Georgi Ganev, Chief Executive Officer]

Thank you very much for listening, and especially this call, I would say, for many questions. Thank you very much. And as a reminder, we will report the results for the full year of 2020 on the 4th of February 2021. And again, we will come out with a separate invite regarding our Capital Markets Day later this fall. So stay safe, everyone, and thank you very much. Bye.