We are invited to view the imminent arrival on the London stock market of The Hut Group, a Manchester-based e-commerce retailer, as an uplifting story of smart technology, clever marketing and endless growth. Here’s a company that dodges Amazon’s thunderbolts and attracts some of the world’s biggest consumer companies – the likes of Nestlé and Procter & Gamble – to its “end-to-end” platform.
In a retail world dominated by shop closures and redundancies, The Hut Group sings a different tune. It claims the flotation will create more millionaires than any other listing of a British company, thanks to founder and chief executive Matthew Moulding’s long commitment to employee share ownership.
Fans say we shouldn;t be surprised by firm’s success after its controversial start in life – posting CDs from Guernsey to the UK to exploit a tax loophole. Backers have included big beasts from retailing’s old world: Sir Terry Leahy, former Tesco chief executive; Angus Monro, once boss of Matalan; and Tom Hunter, the Sports Division entrepreneur.
So, yes, the investment banking advisers and promoters – a bloated cast list of eight firms – have good lines to pitch to prospective share buyers. The Hut Group is looking to raise £920m, valuing the company in its current form at £4.5bn.
The latter figure should cause a sharp intake of breath. A market capitalisation of £4.5bn is enormous for a company of The Hut Group’s relative immaturity. Next – widely regarded as the slickest big retailer in the land, which has already shifted half its trade online – is worth £8.1bn. Can a youthful upstart really be worth more than half as much already?
There are many reasons to think not. First, the bald financials. Revenues last year were £1.1bn and top-line earnings were £111m. A rating of 40 times 2019 earnings is punchy. It’s not as if operating profit margins are off the chart: at a steady 8.8% to 9.8% over the past three years, they are healthy rather than paradigm-shifting.
Second, rivals are not standing still. The bulk of The Hut Group’s business is in beauty and nutrition products: the former category includes brands such as Espa and Illamasqua; the latter is led by sports brand Myprotein. These markets are highly competitive, and deep-pocketed multinationals are also experimenting with direct-to-consumer sales models.
Third, the notion that those big brand owners will flock to use The Hut Group’s e-commerce platform has yet to be tested properly. The group has some eye-catching clients (as well as Nestlé and P&G, these include Walgreens Boots Alliance, Johnson & Johnson and others), but boasts about “powering over 1,000 third-party brands” require context. Revenue from the relevant division, called THG Ingenuity, was just £61.4m, out of a group total of £675m in the first half of this year.
Fourth, it’s not obvious that The Hut Group needs to go public. Moulding says the impetus was “a request for liquidity” from some private equity backers. Private equity firms are cute about timing sell-downs, so that’s not a selling point.
In fact, even after listing, The Hut Group seems to want to live the life of a semi-private company. Despite owning only 20% of the equity himself, Moulding is insisting on retaining a “founder’s share” to block unwanted takeover bids. Such arrangements are common in the US, but they’re not the UK’s way of doing corporate governance. Nor is the potential £700m extra share jackpot for Moulding if he gets the valuation to £7.25bn in three years.
It would, of course, be an impressive achievement if the company does reach £7.25bn. But let’s see it justify £4.5bn first. It looks too much, too soon.
Streaming will come full circle if Napster rises again
Back in 1999 when Britney Spears, Backstreet Boys and Ricky Martin topped the charts a digital music upstart, Napster, effectively began the streaming revolution. Last week, a new chapter began in Napster’s chequered history when MelodyVR, a British startup that films and streams virtual reality gigs, acquired it in a $70m deal.
After more than a decade of plummeting CD sales and rampant piracy, the success of streaming services that followed in Napster’s trail-blazing wake, such as Spotify and Apple Music, has given the music its mojo back, global music sales have grown for five straight years, and investors like what they are hearing.
Next week Hipgnosis, a London-listed company offering the chance to make money from the royalties of artists from Bon Jovi to Beyoncé, will be promoted to the FTSE 250. Earlier this summer Warner Music, the world’s third largest music company, floated in the US, selling $1.9bn in shares to keen investors giving it a market value of more than $12bn. Its owner, Len Blavatnik, paid just $3.3bn for the company in 2011. This followed a deal struck in December by Universal Music, the home of stars including Taylor Swift, Lady Gaga and the Beatles, which sold a 10% stake to a consortium led by the Chinese tech giant Tencent valuing the world’s largest music company at 30bn Euro (£25bn).
Streaming, if not live music, has proved to be coronavirus-proof. Spotify, the world’s largest service, reported a jump in paying subscribers of more than 27% to 138 million in the second quarter.
However, Napster, which has been bankrupt and is on its third owner, reported an 18% fall in revenues to $23m as subscribers fell away. Napster made $113m last year, and just $1.8m profit, while MelodyVR fell £15m into the red. The new MelodyVR/Napster combination is hoping that it will be the next to cash in on the promise of the streaming revolution that Napster started.
Low-cost borrowing is here to stay
Even before Covid-19 struck, ultra-low interest rates from central banks were a mainstay of the global economic outlook. Post-pandemic, borrowing costs will be at record lows for even longer.
In a landmark speech last week, Jerome Powell, the chairman of the US Federal Reserve, ripped up the central bank’s rule book for setting rates. Rather than targeting 2% inflation, an average of that will be aimed for over time.
The shift allows rates to remain low for longer, and is important because the Fed will not have to take immediate action if inflation drifts above 2% from time to time.
In the recovery from the pandemic, this new approach will provide a powerful tailwind to support jobs and growth. Given the sheer scale of the collapse in economic activity around the world this spring, and the chronic risk to the economy from the persistence of the Covid-19 outbreak, this guarantee of monetary policy support is vital.
It is a lesson that Andrew Bailey, the governor of the Bank of England, will no doubt be quizzed about when he appears before MPs on the Commons Treasury committee on Wednesday. As in the US, it is expected that interest rates will need to remain low in the UK.
Threadneedle Street has not gone as far as the Fed in targeting average inflation, but hints from the Bank suggest the cost of borrowing will remain low for a long time. Indeed, Bailey has suggested negative rates could be required to reboot growth.
After the relaxation of lockdown restrictions boosted growth this summer, analysts expect Britain’s recovery could fizzle out in the autumn as unemployment rises.
The consultancy Capital Economics expects the Bank to pump a further £100bn into its quantitative easing bond-buying programme to stimulate the economy. Interest rates are expected to stay at the current record low of 0.1% for the next five years at least.
Support of this kind for the economy will be vital for years to come.