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What to Do When SoftBank Says ‘Not for Us!’

WARRINGTON, ENGLAND - DECEMBER 10: Britain’s Prime Minister and Conservative party leader Boris Johnson (L) is shown around by company founder Matthew Moulding (R) during a visit to a fulfillment centre for The Hut Group (THG) during a general election campaign event on December 10, 2019 in Warrington, United Kingdom. The U.K will go to the polls in a general election on December 12. (Photo by Ben Stansall - WPA Pool / Getty Images)
WARRINGTON, ENGLAND - DECEMBER 10: Britain’s Prime Minister and Conservative party leader Boris Johnson (L) is shown around by company founder Matthew Moulding (R) during a visit to a fulfillment centre for The Hut Group (THG) during a general election campaign event on December 10, 2019 in Warrington, United Kingdom. The U.K will go to the polls in a general election on December 12. (Photo by Ben Stansall - WPA Pool / Getty Images) (Photographer: WPA Pool/Getty Images Europe)

THG Plc, formerly known as The Hut, just missed out on a $1.6 billion investment from SoftBank Group Corp. It’s not easy to see how the e-commerce retailer, led by Matthew Moulding, will be able to replace that injection. THG will have to live within its means for the next few years.

To recap: In May 2021, THG announced a $2.3 billion deal with SoftBank.  Masayoshi Son’s venture capital firm became a cornerstone investor in the Manchester-based company, and agreed to work with it, for example on robotic warehouses. But the most eye-catching element was a $1.6 billion option for SoftBank to acquire a 20% stake in Ingenuity, the THG business that helps consumer companies sell directly to their customers via the web.

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

It’ll be tricky for THG to find a similar deal, or raise funds from other investors — especially with the shares of Moulding’s company having fallen 90% from their peak of almost £8 ($9.66) in January 2021. The broader tech sell-off doesn’t help, neither does the fact that online retail is losing steam as economies reopen. The $1.6 billion was earmarked for Ingenuity, but there might have been a way for the capital to benefit the broader THG conglomerate, which includes arms that sell beauty and nutrition products online.

There’s no immediate need for funding. The group had gross cash of £537 million at the end of 2021, and an undrawn revolving credit facility of £170 million.  Meanwhile, THG’s already completed a good chunk of the investment needed to kickstart Ingenuity.

But analysts at Barclays estimate that THG will have annual free cash outflows until 2025, when it is expected to turn positive as profit improves at the online businesses and Ingenuity gains scale. Consequently, they predict that gross cash will fall to about £100 million by the end of 2025. In a recent note, Barclays said that while it didn’t think that THG needed to raise capital, preserving it would be important.

It’s hard to see Moulding being as aggressive on deals as he has been in the past. That may not be a bad thing. The company will have to concentrate on generating growth from its three existing divisions. If it is successful, that could help reassure investors.

But a focus on underlying performance comes at a delicate time. Consumers are shifting away from purchasing via the click of a mouse or tap of a smartphone to shopping in physical stores. And with tech valuations having come down, it also means that Moulding will likely miss out on attractively priced opportunities.

THG may have some other options. The company announced last week, alongside the termination of the SoftBank option agreement, that it had completed the internal separation of the three divisions. That could make it easier to seek investments for each unit individually. Given current market conditions, a planned listing of the beauty arm looks unlikely. But THG’s nutrition business could be more interesting. The big consumer goods conglomerates are looking for ways to accelerate sales growth with more sought-after categories. Nutrition, with products from vitamins and supplements to snacks, could be worth more to them than THG investors. Barclays recently put the value of the division at £320 million.

However, Moulding may be reluctant to part with the nutrition unit because it is estimated to be more profitable than beauty, and because of the slump in tech valuations.

Earlier this summer, THG rejected a £2.1 billion proposal for the entire company from a consortium of Belerion Capital and hedge fund King Street Capital Management. Property entrepreneur Nick Candy’s Candy Ventures also walked away.

So, the company has little option but to try to grind out growth from its online businesses and Ingenuity. Unless Moulding, who owns about 20% of THG, were to take it private.

That wouldn’t be so straightforward either. With such wild swings in the stock price, determining the buyout level is tricky. The shares are trading at about 68 pence, valuing the company about £850 million. That makes the cost for Moulding smaller — but shareholders who bought into the company’s initial public offering in September 2020 at £5 will be reluctant to exit for a pittance. And there’s the small matter of Moulding’s recent statement that he thought the business was worth more than £2.1 billion.

SoftBank’s investment was a neat solution. Adapting to reality without it looks less tidy.

More From Other Writers at Bloomberg Opinion:

The Hut Needs to Step Up Its Makeover, and Fast: Andrea Felsted

Private Equity Can Lap Up British Businesses Again: Chris Hughes

Brexiteers Want a Piece of the Bank of England: Paul J. Davies

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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

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