The breathless pace of deal-making might be baffling THG shareholders

Deal-making is great if it actually creates value, but company’s latest spin-off seems an odd move

Last modified on Thu 16 Sep 2021 14.33 EDT

If you thought the world of social media influencers and digital commerce “platforms” was baffling already, Matthew Moulding is not about to make THG, or the Hut Group as it was, any easier to understand.

In its latest rejig, the hyperactive company plans to spin-off its beauty operation that owns the Lookfantastic cosmetics website. THG would retain a majority stake but, since THG Beauty is the group’s biggest division, the move is odd – certainly for a company that floated only a year ago.

THG cited a need to focus investment in “key growth areas, including own-brand portfolio expansion”. Translation: Moulding thinks external investors would award a sky-high valuation to a separately listed THG Beauty, which, in turn, could issue equity to buy cosmetics brands at similar lofty ratings.

It’s a theory, and it’s certainly true that the online cosmetics game is in a land-grab stage and THG anxious to participate (it paid £275m for Cult Beauty only last month). But is THG Beauty really an undervalued asset within the current setup?

Maybe it is, but Moulding’s last effort to demonstrate hidden value within THG cannot be said to have set the share price alight. In May’s deal, SoftBank of Japan was given an option to buy a 19.9% stake in THG’s smaller software and logistics division, Ingenuity, at an implied valuation of £4.3bn. That looked superb versus £7.5bn currently for the whole of THG, but the shares barely reacted.

As 596p, down 7% on Thursday, they are still well above the 500p float price, but one wonders if the decline from 800p in January is related to investors’ confusion over the breathless pace of deal-making. Even before THG Beauty has been spun off, the group is considering the same for its fitness and nutrition division.

So there could be three separately listed THG businesses, one of which (Ingenuity) would sell services to the other two. And the entire show would be overseen by Moulding in his dual role as executive chairman and chief executive, presumably also keeping his good governance-defying golden share in the whole bundle. It would be a complex setup.

THG is undoubtedly an exciting business in a fast-growing industry: revenues were up 42% to £959m in Thursday’s half-year numbers. But the operational result was still a loss and outside investors may prefer to see more attention on organic growth. Deal-making is great if it actually creates value. But if it’s deal-making with little true purpose, there’s a problem.

John Lewis on the road to recovery

It’s too soon to say the John Lewis Partnership has come through its crisis but Thursday’s update suggested the store closures, the job cuts and round of internal reorganisation are having the intended effect.

There was even a figure resembling a profit at the half-year stage, which hasn’t happened for a couple of years. It was £69m if one ignores exceptional charges. Including those charges (primarily redundancies), there was a loss of £29m. But, in a business that makes its real money over the Christmas period, the group is probably ahead of target after half a lap of its five-year turnaround plan.

The interim target of £200m of profit in the 2022-23 financial year is credible and both Waitrose and the department stores are turning in healthy like-for-like sale numbers. The latter, incidentally, is now making 75% of its sales online, versus 40% pre-pandemic. Yes, for all the sound and fury at the time of the store closures, they had to happen.

Stock market holds fire on Aukus

Rolls-Royce’s shares were up a bit; BAE Systems’ barely moved. On the face of it, the reaction to the signing of the “landmark defence and security partnership” between the UK, the US and Australia was surprising. After all, the centrepiece of the Aukus partnership will be the supply of nuclear-powered submarines to the Royal Australian Navy, and BAE and Rolls are big in subs and their propulsion systems.

One question, though, is how much work will be done in the UK. “The design and build process will create hundreds of highly skilled scientific and engineering roles across the UK, and drive investment in some of our most hi-tech sectors,” said Downing Street’s statement. That is very vague; and “hundreds” is not necessarily a large number in the context of the UK defence industry.

Detailed decisions have yet to be made, of course. But the suspicion in the UK defence industry will be that benefits in terms of order books will flow only if Boris Johnson is prepared to demand them from the US. On that score, the stock market has its doubts.

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