The internet is full of excited influencers unwrapping one of Lookfantastic’s beauty boxes to figure out what’s inside. Those looking at the sender of the parcels know the feeling.
THG’s latest delivery to the market prompted its shares to jump on Tuesday following a deal which promised to alleviate one source of confusion around the company, formerly known as the Hut Group. The stock had lost about a quarter of its value since hitting 800p in January but is now back to nearly 35 per cent above the 500p September IPO price.
THG is best known for sites and brands such as Lookfantastic and MyProtein. The head-scratcher was how to value the group’s much-hyped THG Ingenuity division, the ecommerce outsourcing unit that had just £137m in sales last year.
An investment from the world’s largest technology fund seemed to give an answer. True, SoftBank’s recent track record includes such digital hits as WeWork (main business: real estate) and Wirecard (fraud). But the fund’s SB Northstar division, in a multi-part deal, is getting a free option to buy a 19.9 per cent stake in THG Ingenuity for $1.6bn.
This isn’t for the current version of Ingenuity. SoftBank is interested in a “yet to be formed” subsidiary, which will be created within 15 months and will be majority owned by THG which retains the right to IPO or sell the business if it so chooses.
The market reaction was down to this number crunching: the SoftBank investment values Ingenuity at an enterprise value of about £4.5bn, or about 60 per cent of the group’s valuation before the deal was announced. That equates to 23 times this year’s sales, said Bank of America, which implied a paltry 1.5 times multiple for the remainder of the business.
It isn’t quite that straightforward. What exactly the Ingenuity business does is something of a riddle: chief executive Matthew Moulding described it as a “social media influencer platform” but it also handles the prosaic business of logistics and translations for third parties launching in new markets.
One mystery is why THG has until now also included a manufacturing and product development operation in Somerset in its high-tech Ingenuity wrapper. It bought Acheson & Acheson, maker of cult skincare range Ameliorate, in 2018. According to numbers from Jefferies, that has accounted for maybe a third of Ingenuity sales and is going back to the beauty division where it belongs.
It leaves behind the bit that gives THG its tech glow: its commerce division. This is growing quickly but accounted for only £19.5m in sales last year, or 1 per cent of the total. Combine that with the revenues from logistics and other services, and you get a valuation for Ingenuity of over 30 times 2021 sales from the SoftBank option.
An unanswered question is why a company that raised nearly £900m last September wants more cash and what it plans to do with it. The SoftBank option, if exercised, will deliver $1.6bn of ringfenced funds into a unit currently spending $100m a year in capex.
There were no details on the plans for that money. The promised collaboration with SoftBank’s portfolio companies could establish how well Ingenuity’s mix of tech plus influencers works in markets beyond beauty. The example given, though, was THG using the robotics of SoftBank-backed AutoStore in its new warehouse.
The SoftBank validation of Ingenuity also came at a cost to current investors (including the CEO, as the largest shareholder and owner of a takeover-blocking golden share). SoftBank is taking an 8 per cent stake in THG group, which alongside a placing will raise $1bn, diluting IPO investors.
That money seems likely to go on deals. THG said that it was spending $255m on a New Jersey-based beauty manufacturer, Bentley Laboratories, and has another purchase in the works.
Ex-Ingenuity, THG starts to look more like a roll-up of beauty and nutrition brands that happen to be sold through websites, rather than a technology business per se. Some of the global comparisons suggested for those brands, like Lululemon and Peloton in wellness, seem a stretch. And how dependent the businesses are on Ingenuity for their growth rates and what that will cost on an arms-length basis is another question outstanding.
THG’s listing and time as a public company has been somewhat overshadowed by the golden share, the instagrammable CEO, his pay cheque and his property deals. That’s the colourful cardboard and tissue paper, important to the overall experience but not what you’re really getting. It would be nice to know more about what’s inside the box too.