As THG demerges its Ingenuity division, Retail Week examines what this means for the online retail giant
THG revealed this week that it plans to take its business-to-business digital solutions arm, Ingenuity, private, separating it from the rest of the group to simplify its business model.
The remaining business, which the group refers to as THG RemainCo, will include its core consumer beauty and nutrition operations with brands such as Lookfantastic, Cult Beauty and Myprotein.
THG aims to turn itself into a “simpler, cash-generative business capable of paying future dividends” once the change comes into effect.
Here, Retail Week takes a closer look at the decision, the rationale behind it and whether the ecommerce company will reap rewards as a result.
The demerger
In simple terms, THG is turning Ingenuity back into a private company, while the RemainCo business will continue to trade on the London Stock Exchange (LSE).
Chief executive Matthew Moulding wrote on LinkedIn: “It’s clear that the LSE isn’t a place for a tech/infrastructure business like Ingenuity. It’s been a volleyball for rogue operators to hit when looking for a quick win. And so, after over four years, it’s time for a change.
”After months of background work, THG’s board recently agreed to privatise Ingenuity, while also ensuring it was fully funded for life as a private company. This meant raising c£95m via a placing, which mainly goes to Ingenuity when it breaks away from THG in December.”
Moulding led the fundraiser for the demerger, putting in £10m and bringing his total investment in THG to £50m. Other long-term and institutional shareholders contributed another £40m.
Mike Ashley’s Frasers Group, which partnered with THG on Ingenuity in June, also became an investor with a £10m strategic investment.
The reason
THG as a group had a complex business model, unlike any other in the market. It owns a set of direct-to-consumer ecommerce brands in the beauty and nutrition space; a B2B digital solutions arm, Ingenuity; and the City AM newspaper.
Until last year, it also owned an incubator division called OnDemand.
The business model has been a subject of dispute for some investors including activist investor Kelso.
In a letter to the THG board in December, Kelso, which was pushing for a demerger, said it believed the three distinct divisions within THG – beauty, nutrition and Ingenuity – were worth “considerably more as separate businesses than the current market capitalisation of THG”.
THG was worth £5bn when it floated on the London Stock Exchange in 2020 but is valued at less than £1bn today.
A demerger solves the problem of the disparity between THG’s share price and its fundamental fair value, says Peel Hunt research analyst John Stevenson.
He explains: “You look at look at beauty, look at nutrition, look at how we value those businesses. Either of them has a value that’s arguably bigger than the market cap of the whole group. When you start looking, you wonder why is the share price where it is.
“The comments back from investors are all around having difficulty in terms of understanding what the core business is doing and arguably some of that is enabled by THG with the lack of transparency around Ingenuity. A demerger sees Ingenuity carved out and leaves RemainCo with a very, very, very clear business model.”
Moulding said any profits and cash made from its beauty and nutrition businesses were ”relentlessly reinvested into building Ingenuity” since starting THG.
This will no longer be the case as he added that post-demerger, “instead of reinvesting this cash back into Ingenuity each year, THG will now use the cash however it chooses”.
Stevenson predicts the demerger will leave THG with a highly ”tangible” model.
“The consumer business next year will have about £1.9bn sales, on our forecast, with £130m-plus of EBITDA. It’s profitable at a pre-tax level, with over £40m profit before tax, and it would generate almost £90m of free cash flow. That free cash flow is coming through every year. So it’s a very, very tangible, suitable model,” he says.
Focus on retail
In the immediate term, the demerger shouldn’t have any impact on RemainCo’s day-to-day operations. However, it does improve the group’s appeal as an M&A target, says Stevenson.
“From a mergers and acquisitions point of view, for external parties starting to look at RemainCo, it’s very clear what you’re getting. There’s no concern around Ingenuity and that sort of black box that people don’t understand,” he says.
While THG’s beauty division continues to drive revenue, growth in the medium term will be dependent on its nutrition division, which has been promising a bounceback for some time after quarters of double-digit decline, says Tash Van Boxel, an analyst at GlobalData.
She says: “When this demerger does take place, THG must refocus on its nutrition arm by entering into more partnerships with high street favourites – such as its Müller collaboration – and expanding its presence in physical stores. Without investment in its nutrition offer, this division will continue to pull down revenue.
“THG Beauty is its strongest fascia but beauty cannot buoy sales if nutrition continues its double-digit decline, pulling down its overall revenue result.”
Once the demerger is completed, all eyes will be on THG RemainCo and whether it can deliver its goal of being a “simpler, cash-generative business capable of paying future dividends”.
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