Matthew Moulding has muttered about spin-offs at THG almost from the moment he brought the Lookfantastic and Myprotein e-commerce company, then called The Hut Group, to the stock market four years ago at a princely valuation of £4.5bn.
Here comes the first actual proposal, albeit one at a very early stage: there could be a “demerger” of Ingenuity, the division that provides “cutting-edge commerce solutions” to THG’s beauty and nutrition operations and also to third-party brands. With THG’s shares down almost 90% since listing, it may indeed be time to try something crowd-pleasing. The problem, though, is that this plan looks hellishly complicated.
For starters, demerger is surely the wrong word. “It is likely Ingenuity becomes a private company but, as it will be loss-making for the next five years, funding of the business will be required,” thinks Panmure Liberum’s analyst. That sounds more like a disposal, an impression supported by Moulding’s own remarks about THG shareholders merely being given the chance to “partake” in the separated entity.
But, if it’s really a sale, will the break be clean? Well, ownership could clearly be separated but day-to-day dealings are another matter because Ingenuity generates the bulk of its revenues (£226m out of a total of £306m in Tuesday’s half-year numbers) internally from the rest of THG. So the contractual trading terms between THG and Ingenuity would clearly be crucial to any split. And how would group debts be divided? Would the remainder of THG also be funding Ingenuity to some degree?
One can, of course, see the theoretical appeal of division. As Panmure Liberum also says, if there is no debt recourse to THG, and if THG is free to use its positive cashflows from nutrition and beauty for shareholder-friendly dividends or whatever, “then significant equity value would be released” in the listed company. But getting to that point requires somebody – private equity? – being willing to take a punt on the loss-making Ingenuity and being sufficiently confident in the long-term trading relationship with THG.
Maybe it will happen, but it is a far cry from the days when Moulding was granting options to SoftBank of Japan for a 20% stake in Ingenuity at fabulous implied valuations. Those options were never exercised and the game now, it seems, is about shielding core THG from Ingenuity’s capital demands for new warehouses and whizzy automation technology. Cash outflows of another £150m are projected before Ingenuity reaches break-even.
One cannot say the stock market went wild for the new plan. THG’s shares fell another 10% to 58p, albeit the other factor in the half-year numbers was missed profit forecasts in nutrition.
The bottom line, though, is that THG has reached the point where Moulding is trying to prove the thesis that his e-commerce creation would be worth more than the bombed-out share price if only outsiders could see the parts more clearly. He has gone early, without a timetable, with a proposal that, to put it mildly, requires hard detail. It would be embarrassing if the Ingenious thinking proves too clever by half.