News of numerous takeover approaches sounds thrilling but outside investors in THG, formerly The Hut Group, would be wise to contain their excitement. The online retailer’s share price had sunk so low that the company was being valued at half the level of its annual turnover, so it would almost have been odd if nobody wanted to have an exploratory poke around the aisles.
Nor did THG say at what price the “indicative proposals” were pitched, only that the founder and chief executive, Matthew Moulding, and the board thought they failed to reflect “the fair value of the group”. The definition of a fair price in this context is anybody’s guess. THG floated at 500p in 2020 but, even after Thursday’s mini relief rally, now trades at 110p.
No approaches remain on the table, the company added, so shareholders should probably assume that THG’s attempt at investment redemption will have to follow the harder road that involves grinding out the reliable numbers.
On that score, Thursday’s report was mixed. Revenue guidance for 2022 – growth of 22-25% – is intact and, while pre-interest, pre-depreciation profit margins for 2021 were a bottom of the range 7.4%, they didn’t qualify as a miss.
On the other hand, margins are probably going lower this year as input inflation hits in key areas of protein shakes and makeup. And true believers in the tale of building infrastructure to deliver abundant long-term growth still have to look past the operating losses (a thumping £137m last year).
Then there is Moulding’s apparent obsession with corporate reinvention – the promised demerger of the Lookfantastic-based beauty division plus the Japanese group SoftBank option to buy 20% of Ingenuity, the bit that provides “end-to-end technology services” to THG’s and other people’s brands. That agenda (plus Moulding’s hyperbolic utterances) is one of many factors that tends to baffle outsiders. Why does THG make the relatively simple business of selling stuff online sound so complicated?
The arrival of Charles Allen as chairman is supposed to deliver governance reforms and greater clarity. Both are work in progress. The boardroom needs to be rinsed of Moulding’s former private equity fanclub, and THG needs to say out loud that the demerger plan has been dropped, rather than merely hint at a rethink. Meanwhile, an end to the tease with SoftBank, which surely isn’t going to exercise its Ingenuity option at the advertised (and out of date) $1.6bn price, would remove another distraction.
Allen is fresh in post. The sooner he sets a new direction towards boring simplicity, the better.
Ackman cancels Netflix
“When the facts change, I change my mind. What do you do?” runs the quote of disputed origin. In the case of Bill Ackman and Netflix, the answer is that the billionaire investor has learned to run for the hills. His Pershing Square fund, an off-shoot of which is a member of the FTSE 100 index, sold its entire 7% in the streaming firm on Wednesday at a loss of $400m only three months after buying it.
Back in January, Ackman gushed about Netflix. The subscription model offered “highly recurring revenues, which have enormous future growth potential”. Management was “truly best in class”. The company enjoyed pricing power, an opportunity to increase profit margins and an “improving free cashflow profile”.
Now he’s not so sure. Ackman supports the company’s response to weak subscriber numbers but reckons actions such as chasing non-paying customers and introducing a discounted option with adverts will make the business model harder to predict. Thus he’s out.
He will look a fool if Netflix’s share price rallies after this week’s 40% plunge. But one can almost admire the willingness to cut losses. Ackman’s biggest disasters over the years – at the pharma group Valeant and via a short bet against Herbalife – involved hanging around too long. Investment mistakes, or doubts, are best admitted early.
Musk’s Twitter offer could be sweeter
Elon Musk seems to have the financing in place for a $43bn offer for Twitter. The package includes putting up $21bn of his own money and raising $12.5bn of debt secured against his Tesla stake. As long as the equity portion is secure, and assuming Musk is prepared to brave the board’s devious “poison pill” tactics, it ought to be enough to launch a tender offer.
The hardest part, though, is understanding why Twitter’s shareholders would want to accept an offer at $54.20 a share. The price was $70 as recently as last summer. Because it’s Musk, the narrative is all about one man’s ambition – but the takeover terms really aren’t compelling.
