By Aryan Mehra (University of Western Ontario), Charlie Solnik (California Polytechnic State University), Chirag Gupta (NYU Stern)
This report was initially written on September 9th, 2020.
Overview of the Deal
The week of August 24th, British e-commerce company, The Hut Group (THG), announced its plans to sell $1.2 billion worth of new shares in an IPO that could possibly be the biggest UK IPO this year. With only seven companies having issued an IPO this year, THG is attempting to take full advantage of the UK's languishing stock market. The company aimed for September 16 to launch its offering and was successful in doing so. This IPO is not a regular IPO by any means as it includes some special features such as a founder’s share and will be a fixed price offering.
Found in 2004, the beauty and luxury retailer has grown to become one of the few Unicorns in London through continued strategic acquisitions of e-commerce companies. Private investors such as Blackrock and Merian Global Investors have been enjoying the company's accelerated growth, and this IPO will be sure to attract strong demand as everyone else looks to get a piece of the company.
Despite bright prospects, the IPO is prone to fundamental risks as the UK economy has been taking a beating, GDP is down 22.1% in the first half of 2020 owing to the uncertainty surrounding Brexit. While investors do have extra cash, those looking to invest in British equities may get caught up in a value trap if Brexit negotiations go south. Even with high valuations at the moment, UK companies' earning growth potential may dissipate post-Brexit. While this IPO is poised to be London’s biggest this year, it will still face its fair share of challenges leading up to and post IPO.
The UK economy has been one of the hardest-hit global economies in the world with its GDP shrinking by 22.1% in the first half of 2020, the most of any G7 economy. Additionally, the UK is engaged in negotiations with the European Union regarding the terms of Brexit which can lead to high currency fluctuations in the future. If a deal does not go through with Brexit, we may see the pound fall to as low as $1.14 as it did back in March 2020. However, the more likely scenario is that the pound will trend upwards once a deal is agreed upon. The value of the pound is very important in regards to foreign investment. A lower pound would mean it's cheaper for investors outside of the UK to purchase UK stocks and bonds - which would not only boost the country’s reeling economy, but also be great for companies such as The Hut Group. The Hut Group primarily sells products within the beauty space, products which are not essential in the midst of a global pandemic. Lower disposable income and a hurting economy pose potential risks to investors of The Hut Group. In the short-term, sales may take a hit. However, this can be offset through the company’s other major source of revenue which is selling its proprietary e-commerce software.
Companies have searched for alternative ways to navigate all of the uncertainty and volatility that has been haunting most financial markets since early March. Companies have turned to Special Purpose Acquisition Companies (SPAC’s), Direct Listings, and Traditional IPO’s to raise capital and keep costs low, such as investment banking advisory fees. The COVID-19 pandemic slowed many companies’ plans to go public. Direct Listings no longer seem viable as the current economic climate has made it difficult for companies to find large institutional investors, and companies are now unfreezing their plans to go public and turning to IPO’s.
More specifically, the UK has seen significantly decreased IPO activity with approximately two times as many companies going public by this time last year. This decline in primary market offerings can again be attributed to the COVID-19 pandemic. In attempts to stimulate their economies, many countries around the world are lowering interest rates. Low-interest rate environments have historically led to the delay of IPOs, and history seems to be repeating itself with the recent lack of IPOs in the UK.
The Hut Group is a British e-commerce company that was founded in 2004. The company operates over 100 websites and sells everything from Healthcare to Beauty products. THG has strategically acquired Zavvi, IdealShape and GLOSSYBOX and expanded globally. Even though THG is based in the UK, most of the company’s revenue comes from customers outside the UK. Along with acquiring companies, THG sells its proprietary e-commerce technology to other customers such as Nestle.
The Hut Group is looking to sell £920 million ($1.2 billion) worth of new shares. Existing Private shareholders will be reducing their stake in the company by an undisclosed amount, leading to a minimum free float of 20% before any new capital is raised. Matt Moulding, the Chief Executive Officer of the company, stated that he doesn't plan to sell any of his shares in the IPO, retaining a 25.1% stake in the company. This is a positive sign that leadership sees strong long-term prospects for the company well after the IPO. The most interesting part about this IPO is it will include a founder’s share (AKA a golden share) for Matt Moulding. This founder’s share will give him the power to veto any hostile takeover attempt for the next three years. THG has seen a lot of interest from outside buyers, but the founder is not looking for a quick payday; instead, he is looking to turn the company into a major player in the e-commerce market.