What to do when SoftBank says “Not for us!”

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THG Plc, formerly known as The Hut, narrowly 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 Molding, 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 has become a leading investor in the Manchester-based company and has agreed to work with it, for example on robotic warehouses. But the most eye-catching item 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 customers via the web.

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

It will be difficult for THG to find a similar deal or raise money from other investors – especially with shares of the Molding company having fallen 90% from their peak of almost £8 (9.66 $) in January 2021. off doesn’t help, nor does the fact that online retail is waning as economies reopen. The $1.6 billion was intended for Ingenuity, but there may have been a way for the capital to benefit the larger THG conglomerate, which includes arms that sell beauty and nutrition products online.

There is no immediate need for funding. The group had gross cash of £537m at the end of 2021 and an undrawn revolving credit facility of £170m. Meanwhile, THG has already made much of the investment needed to launch Ingenuity.

But Barclays analysts believe THG will have annual free cash outflows until 2025, when it should turn positive as earnings improve in the online business and Ingenuity gains momentum. Therefore, they predict that gross cash will fall to around £100m by the end of 2025. In a recent note, Barclays said that while they do not believe THG needs to raise capital, it would be important to preserve them.

It’s hard to see Molding being as aggressive on deals as they have been in the past. Maybe that’s not a bad thing. The company will need to focus on generating growth from its three existing divisions. If successful, this could help reassure investors.

But the focus on underlying performance comes at a tricky time. Consumers are shifting from shopping via the click of a mouse or the touch of a smartphone to shopping in physical stores. And with tech valuations falling, it also means that Molding will likely miss opportunities at attractive prices.

THG may have 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. This could make it easier to find investments for each unit individually. Given current market conditions, a planned listing of the beauty branch seems unlikely. But THG’s nutrition business could be more interesting. Large consumer goods conglomerates are looking for ways to accelerate sales growth with more in-demand categories. Nutrition, with products ranging from vitamins and supplements to snacks, might be worth more to them than THG investors. Barclays recently valued the division at £320m.

However, casting may be reluctant to separate from the nutrition unit as it is deemed more profitable than beauty and due to falling tech valuations.

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

So the company has little choice but to try to capitalize on the growth of its online business and Ingenuity. Unless Molding, which owns about 20% of THG, privatizes it.

It wouldn’t be so simple either. With such wild swings in the stock price, it is difficult to determine the level of redemption. The shares are trading at around 68p, valuing the company at around £850million. This lowers the cost of Molding – but shareholders who signed up for the company’s initial public offering in September 2020 at £5 will be reluctant to walk out for a pittance. And there’s the small issue of Molding’s recent statement that he thought the business was worth more than £2.1billion.

SoftBank’s investment was an attractive solution. Adapt to reality without making it seem less orderly.

More other writers at Bloomberg Opinion:

The hut must accelerate its renovation, and quickly: Andrea Felsted

Private equity can delight UK businesses again: Chris Hughes

Brexiters want a piece of the Bank of England: Paul J. Davies

This column does not necessarily reflect the opinion of the Editorial Board or of 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 at bloomberg.com/opinion

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