THG plans tech services spinoff to fix balance sheet

The struggling online company THG is planning to sell off its technology services arm and switch the listing of its core beauty and nutrition business in an effort to boost its flagging share price.
The business, formerly known as The Hut Group, said it was “actively undertaking detailed work to review potential structures to facilitate the demerger of THG Ingenuity”.
The division, which has 4,000 employees and 12 distribution centres globally, provides ecommerce and logistics to other retailers. If spun off, it would leave the company with its beauty and nutrition arms, which it described as “highly profitable, cash-generative and capable of dividends”.
The Manchester-based group behind the brands MyProtein and Cult Beauty believes the move will simplify its structure and help investors to better understand the business.
However, shares in the business closed down 6½p, or 10 per cent, at 57¾pafter the company lowered its earnings outlook and analysts sought clarity around future funding.
Wayne Brown at Panmure Liberum said the spinoff was potentially good news but added that it was unclear how the Ingenuity division, “which loses significant cash every year”, would be funded under the plans.
THG, which was co-founded by Matt Moulding in 2004, has had a tough time since it listed on the London stock market at a £5.4 billion valuation in 2020. It has lost about 90 per cent of its market valuation since going public amid disappointing sales and a series of rows about the company’s corporate governance.
The company, which also owns the brand Lookfantastic and CityAM newspaper, said it planned to transfer its listing to a category that would allow it to be included in FTSE benchmarks. THG is currently part of a “transition” category following the introduction of new rules from the Financial Conduct Authority which came into effect in July.
The regulator is changing the UK’s listing rules in an attempt to boost the attractiveness of the City of London amid fears of its dwindling status among global public companies.
THG wants to move to the equity shares (commercial companies) category, which it said would allow it to be considered for inclusion in the FTSE UK Index Series, raising its visibility. THG hopes to complete this transfer by March next year.
Moulding — who in January likened his life as an entrepreneur to participating in Squid Game, the South Korean dystopian survival thriller series — has long been a vocal critic of the London market and has said he regretted listing THG.
Kelso Group, an activist investor in THG, has repeatedly argued that splitting up its three divisions could help to lift its share price to 225p and achieve a market valuation of about £3 billion.
John Goold, chief executive of Kelso, said THG had “strategically done the right thing. I think someone will now come in and bid for the company as the valuation is nonsense.”
Any proposed demerger would require shareholder approval, the company said, adding that further information on its proposal to spin off the Ingenuity business would be provided to shareholders in due course.
The company said: “No certainty can be provided on a demerger timescale whilst we consider the options to achieve this outcome. However, structuring tax clearances have now been approved by HMRC”, the UK tax authority. Sky News first reported the plan on Monday.
Alongside the demerger announcement, THG posted its interim results for the half-year ended June 30. The company said it expected adjusted ebitda (earnings before deductions) to be towards the lower end of the analyst consensus range, which it put at £133.8 million to £156.5 million, following a decline in revenue in its nutrition arm.
That was despite pre-tax losses narrowing to £118 million in the half-year to June 30, from £133 million the year before. Group revenue rose 2.2 per cent to £911 million.
Revenue in its Ingenuity division rose 12.6 per cent to £80.2 million, while beauty rose 5.7 per cent to £531 million. However, its nutrition arm fell 10.9 per cent to £299.9 million.
THG said that growth in its Beauty and Ingenuity divisions was offset by a reduction in THG Nutrition online revenue. This was driven by “stock rotation and higher than anticipated promotional activity linked to rebranding, continuing foreign exchange headwinds from Asian currencies, volatility in commodity pricing and the consumer environment remaining uncertain in specific territories”.
Andrew Wade, an analyst at Jefferies, said with first-half ebitda only marginally higher than last year, his prevailing £150 million estimate “now looks stretching enough”, leading him to cut his forecasts to £131 million.
Since THG’s high-profile initial public offering in 2020, the company’s shares have experienced a dramatic decline, losing much of their initial value as investor confidence waned.
Initially hailed for its ambitious tech platform, Ingenuity, which promised to revolutionise ecommerce for other brands, the company has struggled to meet these expectations. Investors quickly realised that Ingenuity’s growth and profitability were more elusive that THG had projected.
The company, which listed on the London stock market at a £5.4 billion valuation, has lost close to 90 per cent of its market valuation since going public. It is currently valued at £758 million.
THG operates under three core businesses: THG Beauty, THG Nutrition, and THG Ingenuity. Investors have long suggested that splitting up its three divisions could help improve its share price.
Analysts argue that a simplified THG might regain investor interest, helping them to better understand the business.
Barclays said it viewed the move as a “positive step in the long term equity story of THG. From a cash perspective this would be quite substantial as close to £80 million of their £100 million capex sits in their Ingenuity business”.
Jefferies said a potential demerger of its ingenuity arm “could unlock meaningful value for shareholders”. They added: “We see this as a potentially very interesting development that could leave a listed business consisting of two high quality, strategically relevant, cash-generative assets in Beauty and Nutrition.”
Brown noted that a simplified business “can win back investors, but they also need to deliver on their guidance and provide positive surprises and earnings momentum”.He also added that investors needed to provide more detail as to how Ingenuity would be funded.
“Currently the ebitda and cash from nutrition and beauty funds Ingenuity,” he said. “Ingenuity is not self-funding. Typically, Ingenuity would get around £80 million from those business units each year to fund Ingenuity capex requirements, so this needs a solution of some kind until there is enough scale in Ingenuity when it can fund that itself.”