Can THG’s SoftBank deal unlock full value from its basket of e-commerce businesses?

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What is to be done when the sum of a company is less than its parts?  

That’s the question that THG PLC’s (LON:THG) proposed collaboration with SoftBank could answer, as a potential spin-out of the Manchester-based group’s technology business aims to unpack what’s seen as a “huge” conglomerate discount.

THG joined the London market back in September 2020, swept up enthusiastically by investors as the e-commerce growth stock’s proposition chimed succinctly with the ‘stay at home’ zeitgeist of the pandemic.

It listed at around 500p per share which valued the PLC at £5.4bn. This marked it as London’s largest flotation for five years and after spiking to around 800p in early 2021 the share remains at a healthy premium to that IPO price.

Indeed, today’s expanded share placing was priced at 596p.

In London the share price advanced strongly on Tuesday, gaining 84p or 14% to trade at 680p, which puts the market capitalisation at some £6.5bn.

Nonetheless, it still belies the values of the underlying businesses, and also the 1,100p price target set by Bank of America Merrill Lynch and 1,080p from stockbroker Liberum Capital.

“The value and relevance of Ingenuity in an industry with fierce competitors (Shopify, BigCommerce) was the biggest pushback we had from investors. We think Soſtbank’s investment could be a testimony of the potential of the division,” the Merrill analysts said.

“The ambition of management to think strategically out-of-the-box is notable,” said Liberum.

SoftBank is providing US$730mln of the US$1.05bn new equity funding into THG PLC and at the same time has agreed a collaboration that could lead to a further US$1.6bn investment into the THG Ingenuity subsidiary.

Under the deal, Ingenuity, which comprises the technology platform that powers THG’s portfolio of e-commerce businesses, is to explore partnerships with SoftBank’s investee companies.

THG has meanwhile launched a review into a more comprehensive spin-out for the Ingenuity unit in the next 15 to 21 months, which it said could include an IPO or a sale.

SoftBank alongside the equity funding and collaboration has been given an option to acquire a 19.99% stake in THG Ingenuity for US$1.6bn. If exercised, the transaction will value the subsidiary alone at £4.5bn (US$6.3bn).

Liberum analyst Wayne Brown reckons the SoftBank deal should lead to a step-change for THG’s growth while noting that the implied valuation of the Ingenuity business highlights the discount applied to THG’s companies.

“Not only does this highlight the significant conglomerate discount THG is on, but leaves huge upside especially when one considers the commercial benefits that will accrue when working with Softbank’s portfolio,” Brown said.

The analyst added: “Softbank’s investment is not just a financial investment but is an operational deal, which underlines not just the strength of the Ingenuity platform.

“The investment puts a high valuation on the Ingenuity platform IP and Ingenuity businesses and assets, at £4.5bn, 63% of the current enterprise value of the THG Group.

“This is before the additional value that will be brought in by the potential commercial partnerships between THG and Softbank’s investee companies, which include a long roster of technology-driven companies that deliver online fitness classes, developed plant-based meats, delivery groceries, or simply sell consumer products online.”

Brown and the Merrill analysts both noted that a credible hard value has now been assigned to the Ingenuity business, which in turn leaves the rest of THG’s market value, only £2.7bn, accounting for the retail businesses.

The Merrill team said this means the other businesses are are therefore trading on a 1.5 times 2021 sales multiples, which is a 60% discount to the online peer group.

“We believe this deal will be a strong positive catalyst as investors we talked to oſten struggled with Ingenuity’s valuation. This is because the business is quite new (only commercialized externally in 2018), quite complex to grasp (revenue generation model changing from fixed fee to revenue share) and is facing large US tech competitors such as Shopify or BigCommerce,” Merrill said in its note.

Away from Ingenuity, Liberum’s Brown says the market in particular is not correctly valuing the strength of the global opportunity for the THG Nutrition business (which includes the MyProtein brand). He also highlighted that the THG Beauty unit’s direct-to-consumer model makes it ‘the leading partner of choice for beauty companies’.

The recently expanded scope of THG Nutrition into a complete health and wellness brand sees its addressable market move to £350bn versus £17bn for the sports nutrition business, a retail vertical that Brown said is set to generate £718mln of sales in 2021, retains ‘a huge runway’ for growth.

He also noted recent M&A activity in the sector which has seen Unilever acquire the Onnit supplements brand and Nestle acquire Nuun sports hydration brand, both for undisclosed sums.

In the beauty business, the company is pursuing an acquisitive strategy, with the latest deal coming alongside the placing and SoftBank deal.

THG is paying US$255mln to acquire Bentley Laboratories LLC, a New Jersey-based manufacturer which is already a key supplier for the company’s Perricone MD brand. The deal internalises the production of Perricone and other THG products, and potentially allows the acceleration of new products.

Moreover, Bentley is a partner to more than 70 prestige beauty brands globally.

Brown notes that the addition of Bentley is expected to boost THG’s revenues by around US$77mln in 2022 and add US$15mln to adjusted earnings.

THG told investors that structural market changes accelerated by Covid-19 have created an exceptional opportunity to expedite its goal of building a ‘unique, digital-first, prestige Beauty own-brand portfolio.’

It intends that the proceeds from the equity raise will replenish its financial resources, fund the Bentley deal and capitalise on multiple other acquisition opportunities. Additionally, it is in advanced discussions with another highly earnings accretive beauty brand acquisition.

Back at group level, the company is considering its options more broadly, along with a possible spin-out of Ingenuity.

It said that it is conducting a review to establish the optimum structure for the separation of THG Ingenuity, THG Beauty, THG Nutrition and THG OnDemand as the company seeks to maximise value for all stakeholders.

Evidently, there’s lots for management to mull over if it is to unlock its full value.

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