This month, Matthew Moulding, founder, chief executive and chairman of The Hut Group (THG), will sound the bell at the London Stock Exchange to mark the bourse's first grand listing since the outbreak of Covid-19. The consumer brands company plans to list at least a fifth of its shares in an IPO that will value it at £4.5bn.
THG is not a pure retail play; its e-commerce platform, Ingenuity, helps partners build their own digital operations, and sits at the heart of the THG proposition. Whether to view the group as a tech outfit is up for debate, but doing so adds a British name to a recent volley of American and Chinese tech listings - juxtaposing it with other founder-led 'Unicorns' (privately-held start-ups valued at over $1bn) like Airbnb. Such a sectoral classification would also go some way towards justifying THG’s blockbuster valuation.
THG will debut during a time of unprecedented disruption for the London market, and the markets in which it operates. While IPO activity has slumped in recent years, consumer goods are undergoing a makeover, with e-commerce finally edging towards profitability.
Relative to the States, the UK is bereft of genuine contenders for ‘tech giant’ status; online supermarket Ocado (OCDO) is arguably the closest entity that we can point to in this arena, with a market capitalisation of £17.3bn. THG has achieved consistent revenue growth through acquisitions and technological expertise. Like Ocado, it is loss-making.
Still, as things stand, THG looks like it could be one of the near-term corporate 'winners' of the pandemic - in contrast with Airbnb, which has been rocked by the coronavirus and its associated lockdowns. The success of these flotations is far from guaranteed, but their successful execution may unlock further IPO activity in the technology sector.
What is the Hut Group?
The Hut Group is more than a consumer brands conglomerate. It is an M&A behemoth that boasts nutrition and beauty segments, a language translation service, an airline and a country club. THG recorded revenues of £1.1bn overall in 2019, up from £916m in the previous year.
That said, it is Ingenuity which separates THG from straightforward consumer goods retailers. THG uses the platform to sell its nutrition and beauty products directly to customers. It also licenses this direct-to-consumer or ‘D2C’ technology to some of the biggest companies in the world, including Nestle (SWXN: NESN) and Coca-Cola (US:KO), helping industry titans develop their online channels and access customers more efficiently. Ocado has found similar success with this model, licensing its own technology to partners who are seeking to establish their own online grocery operations. Ingenuity does, however, only account for around a tenth of THG’s revenues, so it’s perhaps unwise to overplay the group’s tech credentials.
Societal changes in shopping habits also strengthen the argument for raising funds and listing the company. Revenues stemming from THG’s beauty products jumped 55 per cent to £296m over the six months to 30 June, compared with the same period a year earlier, while turnover from nutrition products rose by nearly a third to £258m. “The business is very well positioned to capitalise on the accelerated shift to online retail,” says Richard Watts, who manages the Merian UK Mid Cap Fund (GB00B1XG9482). Merian, a current THG shareholder, is among investors to have pledged £565m towards the listing.
THG is aiming to raise £920m and begin public life in a net cash position. This liquidity will also undoubtedly strengthen its hand in pursuing further acquisition opportunities. Guessing THG’s next deal is a fool’s game, given its eccentric blend of existing assets, but depressed retail valuations could unearth buying potential in this sector. Frasers’ (FRAS) Mike Ashley, who has bought a number of retail companies out of financial distress, including House of Fraser, may be looking nervously over his shoulder at Mr Moulding. Not all investors will welcome such a scattergun M&A philosophy.
A different kind of IPO
The nature of THG’s listing has also courted attention. The group has opted for a standard listing, rather than a premium entry, ruling out its inclusion on a FTSE index. Mr Moulding will be given a ‘founder’s share’, which will help him to block takeovers of the company. Structures that empower CEOs in this way aren’t unprecedented, however. Look across the pond to Snap (US:SNAP), which at its 2017 IPO granted its co-founders Evan Spiegel and Robert Murphy greater voting power through exclusive ownership of ‘Class C common stock’.
With e-commerce now a more permanent fixture in consumers’ lives, the timing of THG’s IPO appears sensible as a means of capitalising on this acceleration of trends. “You’ve got a lot of brand owners that are looking to try and win back a method of getting direct to customer, without having to take it on themselves,” says Gareth Burchell, head of stockbroking at Shard Capital Stockbrokers.
Valuing THG
At around 40 times 2019 cash profits, THG’s £4.5bn valuation doesn’t appear too high when compared with tech peers. Ocado’s market cap sits at 405 times its 2019 earnings before interest, tax, depreciation and amortisation (Ebitda). THG does face competition from the likes of Amazon (US:AMZN), which is a more established D2C player, and THG’s valuation “does seem to price a lot of future success already into the business,” in Mr Burchell’s view.
Valuing an entity like the Hut Group is a difficult task, given the division over what kind of company it really is. Early investors will gain exposure to a fist-pumping M&A machine led by an ebullient figurehead, some of whom may fear an erosion of shareholder value wrought by THG’s acquisitions philosophy. We await its IPO prospectus with intrigue before coming to a verdict.
