Breakingviews: Oatly’s IPO health depends heavily on China

Oatly is soaking itself in China in more ways than one. The Swedish company that makes milk out of porridge oats on Monday filed for an initial public offering in the United States. Prospective investors will have to weigh up the benefits and potential downsides of its relationship with state-owned backer China Resources.

Oatly’s valuation, which people close to the company told Reuters could be as high as $10 billion, hinges on rapid growth in demand for its plant-based milk, which it claims produces lower carbon emissions than the cow-based variety. Sales doubled to $421 million in 2020, helped by a surge in demand from planet-conscious millennials, though Oatly’s net loss deepened to $60 million. A partnership with coffee chain Starbucks in China and the United States, as well as financial backing from celebrities including Oprah Winfrey, helped give it a boost over almond- and soy-based rivals.

Having a Chinese conglomerate as a major investor should help Oatly expand further in Asia, and particularly China, which the company sees as its “largest near-term opportunities”. Though Asian sales more than quadrupled to $54 million last year, the region still accounts for just 13% of the total.

The snag is that having a big state-owned Chinese backer could also sour. China Resources took a majority stake in Oatly in 2016 through a 50-50 joint venture with Belgium’s Verlinvest. The pair currently own 60% and will continue to appoint six directors to Oatly’s 14-person board, provided their combined stake remains above 30% after the offering.

This could be a problem if U.S. authorities crack down on Chinese-backed companies, as they have threatened to in the past. A geopolitical dispute could force China Resources to sell its shares or prevent it from holding board seats. That’s one of the reasons Oatly says it could seek a second listing in Hong Kong if its status as a U.S.-listed company had a “material adverse effect” on China Resources.

A mooted $10 billion price tag would value Oatly at a frothy 24 times last year’s sales, even higher than plant-based rivals like $8.6 billion Beyond Meat. New shareholders will have to decide whether, on balance, the company’s dependence on China is healthy or harmful.