What to do when SoftBank says “Not for us!”



THG Plc, formerly known as The Hut, has just secured a $1.6 billion investment from SoftBank Group Corp. lost. It’s not easy to see how the e-commerce retailer led by Matthew Molding can replace that injection. The THG will have to make do with its funds for the next few years.

As a reminder, in May 2021, THG announced a $2.3 billion deal with SoftBank. Masayoshi Son’s venture capital firm became a cornerstone of the Manchester-based company and agreed to work with him on things like robotic bearings. The most notable element, however, was a $1.6 billion option for SoftBank to acquire a 20% stake in Ingenuity, the THG business that helps consumer businesses sell directly to their customers over the internet.

With the entire company’s value falling well below the option price — and SoftBank having its own problems — it seemed increasingly unlikely that SoftBank would exercise it. While the Japanese company remains one of THG’s largest shareholders, Ingenuity’s option agreement was terminated last week.

It will be difficult for THG to find a similar deal or raise funds from other investors — especially as shares in Molding’s company have fallen 90% from their peak of nearly £8 ($9.66) in January 2021. off doesn’t help, nor does the fact that online retail is losing momentum as economies reopen. The $1.6 billion was earmarked for Ingenuity, but there could have been a way the capital could benefit the broader GHG conglomerate, which also owns Arms that sells beauty and nutrition products online.

There is no immediate need for financing. The group had gross cash of £537m at the end of 2021 and an undrawn revolving credit facility of £170m. Meanwhile, THG has already made much of the investment needed to launch Ingenuity.

But Barclays analysts estimate that GHG will have annual free cash outflows through 2025, when it’s expected to turn positive as earnings from its online business improve and Ingenuity gains scale. Consequently, they forecast gross cash to fall to around £100m by the end of 2025. In a recent note, Barclays said that while it doesn’t believe THG needs to raise capital, it is important to preserve it.

It’s hard to imagine Molding being as aggressive on deals as it has been in the past. Maybe that’s not bad. The company will need to focus on generating growth from its three existing businesses. If successful, it could help reassure investors.

But the focus on underlying performance comes at a tricky time. Consumers are shifting from shopping with a mouse click or tap of a smartphone to shopping in physical stores. And as valuations in the tech space have fallen, it also means Molding is likely to miss attractively priced opportunities.

THG may have some other options. The company announced last week that it had completed the internal separation of its three businesses, in addition to terminating the SoftBank option agreement. That could make it easier to look for investments on a unit-by-unit basis. Given the current market conditions, a planned listing of the beauty sector seems unlikely. But THG’s nutrition business might be more interesting. The consumer staples giants are looking for ways to accelerate sales growth in more desirable categories. Nutrition, with products ranging from vitamins and supplements to snacks, could be worth more to them than GHG investors. Barclays recently valued the division at £320m.

However, Molding is reluctant to divest the nutrition unit as it is believed to be more profitable than Beauty and due to the slump in tech valuations.

Earlier this summer, THG turned down a £2.1 billion proposal for the entire company by a consortium of Belerion Capital and hedge fund King Street Capital Management. Real estate entrepreneur Nick Candy’s Candy Ventures also went away.

So the company has no choice but to try to squeeze growth out of its online businesses and Ingenuity. Unless Molding, which owns about 20% of THG, would take it private.

It wouldn’t be that easy either. With such wild fluctuations in the stock price, it’s difficult to determine the buyout level. The shares trade at around 68p, giving the company a value of around £850m. That makes Molding’s costs lower – but shareholders who bought into the company’s IPO for £5 in September 2020 will be reluctant to exit for a pittance. And there’s the nitty gritty of Molding’s recent statement that he thought the deal was worth more than £2.1bn.

SoftBank’s investment was a clean solution. Adjusting to reality without it looks less tidy.

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This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Andrea Felsted is a columnist for Bloomberg Opinion covering consumer goods and retail. She was previously a reporter for the Financial Times.

More stories like this are available on bloomberg.com/opinion


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