THG: As losses widen, how much is the business really worth?

On Tuesday, THG posted £500 million in operating losses, just hours after it received a preliminary offer from private equity giant Apollo Global Management, causing its share price to surge 43%.

The big question is whether founder Matt Moulding and the THG board that would accept an offer if one materialises.

It rejected a £2.07bn bid from private equity firms Belerion Capital and King Street last year as it “significantly undervalued the company and its future prospects”.

Even with the share price surge this week, THG is still has a market cap of just £1.2bn – a fraction of its £5.4bn IPO.

But what is the company really worth now?

How does the company shape up at the moment?

In its full year results announced this week, sales were up 2.7% to £2.24bn at the online retail group, however, operating losses climbed to almost £500m from £137.5m last year.

“Inflation was a factor in that poor performance, with the company looking to the long-term and choosing to absorb some of the higher costs it faced to protect and retain customers,” Begbies Traynor partner Julie Palmer explains.

“That might be good for customers of THG’s beauty and health products, but it’s a bitter pill for those who bought into the company’s float and have watched the shares plunge ever since.”

For the rest of the year, THG anticipates slow to mid-single digit revenue growth – not what one would expect from a high-growth ecommerce firm – and expects to rebuild historical adjusted EBITDA margins of around 9.0% over the medium-term.

It is also aiming to be free cash flow neutral in its current financial year, turning positive the following, supported by margin accretion and reduced capital expenditure.

However, GlobalData associate retail analyst Sophie Mitchell points out that rivals, such as Boots, are performing much better than THG right now.

“Boots reported a rise of 17.0% for digital sales in its Q2 to the end of February, accounting for 15% of its total sales, illustrating the growing threat Boots poses to beauty online pureplays and its ability to generate significant sales growth despite the difficult online trading conditions in December 2022.

“To better compete with Boots and other beauty players, THG may need to rethink the USPs of its platforms. Where Cult Beauty previously had exclusivity on ‘cult’ brands from its launch in 2008, players such as Sephora, Space NK and Boots now offer the same if not more brands to consumers, with current cult brands such as Rare Beauty noticeably missing from Cult Beauty’s offer.

“THG may need to investigate more exclusive contracts for its retailers with new and unique beauty brands.”

Would Moulding sell?

Moulding clearly has faith in his firm’s future and may still be holding out for a larger sum than the £2bn offered last year.

“There are positive signs this year with revenue edging up and Apollo may have recognised this in its search to bag a bargain,” Palmer says.

Edison’s Neil Shah believes that THG is still an interesting proposition for investment firms.

“The weakening exchange rate has made smaller UK plcs attractive to US M&A activity,” he says.

“THG had previously attracted interest from private equity, yet this time the appetite to agree to a deal looks to be much higher, and investor enthusiasm is reflected in the share price rally.

“Apollo’s proposal is as yet non-binding, but it looks like one of the UK’s high-profile IPO disasters could soon be on its way to becoming private again.”

Moulding hasn’t made much of a secret of the fact he has disliked life as a listed business.

“THG founder Matt Moulding has made no secret of his dislike of life as a listed business and the controls it brings. Should Apollo’s approach turn into a firm offer, then it could be a relief not only for him, but also THG’s long-suffering shareholders,” adds Shah.

How much is THG actually worth?

Improved financial performance and the announcement of its 10-year partnership with online beauty group Maximo, which owns AllBeauty and Fragrances Direct could help bolster THG’s price tag.

The deal with Maximo is expected to add over £150m gross merchandise value to the Ingenuity platform annually.

However, some are doubtful that THG would currently fetch any more than its current valuation.

In fact, business consultant Steve McGeough believes that there’s a chance the business could be sold for under £1bn.

“When you look at the indicators current performance, EBITDA, cash flow and debt they aren’t great,” he tells Charged.

“THG had huge valuation at the start based on expectation and this has crashed as performance or reality has started to flow through.

“A valuation nearer the £500m to £750m feels about right. I also think the overall ecommerce market has struggled and THG will have been caught up in this.

“Let’s hope their recovery plan does just that and they can bounce back to valuations in excess of £2bn.”

After rejecting offers of £2bn last year, it is unlikely Moulding will settle for anything lower.

The fact that THG revealed it planned to push ahead with its move to the premium segment of the main market of the London Stock Exchange shows there are other options ahead of the ecommerce giant.

It may have been a rollercoaster week for THG, but there are sure to be many more twists and turns ahead for Moulding and co.




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