The Sunday Times Business & Money - UK (2021-11-14)

BUSINESS

SOFTBANK STILL FIGHTING CRAZY

Explaining his sometimes madcap investment strategy, SoftBank founder Masayoshi Son likes to say that nobody “wants to pick a fight with the crazy guy”. The Japanese giant struck a typically eye-catching deal in May when it agreed to put $730 million into The Hut Group (THG) and also acquired an option to buy almost 20 per cent of its Ingenuity e-commerce platform for $1.6 billion. The arrival of SoftBank as an investor would allow Ingenuity to start charging THG sister brands such as Myprotein for its services. That would raise costs at THG’s less racily valued legacy businesses and boost sales at Ingenuity, the centre of investors’ hopes for THG, without the need for new contract wins. It could pave the way for Ingenuity to be spun off. But with THG’s market value languishing at £2.4 billion, SoftBank seems unlikely to exercise its option in the near term.

Matt Moulding, with his wife Jodie, can impress potential star recruits with THG’s executive car park, now located by Manchester airport. Top, THG’s facility in Shepherdsville, Kentucky

London’s

tech darlings

suffer a rude

awakening

A string of rocky floats overshadows

the sector, while top investors wonder

whether UK firms have the quality to

compete, writes Jamie Nimmo

Poppy Gustafsson, the boss of Darktrace, was on the verge of celebrating the cybersecurity company’s admission to the FTSE 100 last month when a predator emerged from the shadows. Broker Peel Hunt spoiled the party with a blistering attack, claiming in a scathing note that the shares were worth half of where they stood. It knocked £1 billion off the firm’s value on the day. Despite a fightback from the company, which said that its technology was industry- leading, Darktrace’s shares are still languishing at 40 per cent below their level last month, having surged since listing in April. Gustafsson is not alone. Takeaway delivery firm Deliveroo is still below its £7.1 billion price tag after crashing on its debut. Meanwhile, Matt Moulding, the boss of online health and beauty empire THG, has seen its share price collapse by 70 per cent since September. These wild price swings have prompted top industry figures to wonder whether London struggles to value digital companies with big ambitions — and revived

questions about whether the City really “gets” tech. Robin Klein, general partner at venture capital firm LocalGlobe, said that institutional investors “have missed out pretty badly” on backing successful tech companies. LocalGlobe was an early backer of money transfer business Wise, which listed this year with an £8 billion valuation. “It’s partly because they [institutional investors] misunderstand how to value loss-making, fast-growth companies,” said Klein, who called for a “different breed of analyst” in the City. “My contention is that they don’t recognise the value of the investment in intangible assets such as brand, market share, and people and talent — assets that don’t appear on the balance sheet.” James Anderson, a star fund manager at Scottish investment giant Baillie Gifford who invested early in Amazon, Tesla and Spotify, said the City still had too short-term an approach to tech. He said that investing in the sector “requires different skills: creativity, not analysis; trust, not judgment; and

acknowledgment of uniqueness, not conformity to rote”. It has been a bumper year so far for tech listings in London — the best since the dotcom boom in 2000, according to the stock exchange. Investors have piled £6.6 billion into such companies and more could be on its way. Venture capital investment in British tech this year has already topped £25 billion spanning 1,800 deals — more than double 2020’s level, according to lobby group Tech Nation and data provider Dealroom. Many of those firms will look to float in London but some are already eyeing bigger valuations abroad. Zoopla founder Alex Chesterman listed his second- hand car venture Cazoo on Wall Street through a Spac (special-purpose acquisition company) for a $7 billion (£5.2 billion) valuation. The City regulator is weighing proposals to tear up listing rules in the UK to entice more tech companies to the market. One idea is to give founders more control over their businesses via a

special class of share, with more privileges than those held by ordinary investors. But Romi Savova, chief executive of online pensions provider PensionBee, which floated in April, advised regulators not to water down corporate governance rules. “I think institutional investors’ responses to companies that have come to market with slightly different and unexpected structures validate that,” Savova said. “London is the type of place where you list if you want to do things properly. You can change the rules all you like, but that doesn’t mean institutional investors are going to like it.” She added: “Between when the ideas were first floated and now, quite a lot has been learnt about whether it’s good to have those kind of reforms.” David Richards, boss of WANdisco, which helps firms move data to the cloud, believes the crux of Britain’s problem is the calibre of the underlying technology. “Are there enough high-quality tech firms? The answer categorically is no,” he said. “UK investors don’t see

Romi Savova of PensionBee questions the need for special share classes

enough pure, IP-heavy tech companies. The US is deluged with them ... What UK investors tend to see are retailers who have a website and call themselves a tech company.” Baillie Gifford’s Anderson said that the issues being addressed by British tech companies were not “near the dreams and significance of what we see elsewhere”, claiming that THG “isn’t exactly solving a deep problem of humanity”. “I think we need to be honest about this. The calibre, drive and imaginative grasp are far greater in America. Yes, there are people in the UK who have a raw deal, but let’s be frank — we have not seen a Jobs, Bezos or Musk,” Anderson said, referring to the founders and chief executives of Apple, Amazon and Tesla. “Actually, I fear you can lower the bar from that: what founder CEO in the UK should we hold up as an example to emulate? The current crop from recent IPOs seem to me to be, well, questionable at best.” Gustafsson, Moulding and co better look away now.

LONDON TECH FLOATS HAVE SOARED IN 2021

Source: LSE

Number of listings 2017 9 2018 16 2019 5 2020 8 2021 (to date) 34

funded via the dilution of plc sharehold- ers. Moulding has moved to shake off governance concerns, unwinding a £100 million loan pledge against his stake and promising to relinquish his golden share. Last weekend, he told GQ magazine that being listed had “just sucked from start to finish”. Moulding blamed THG’s share-price slide on “aggressive” short- sellers, whom he compared to bank rob- bers. He said the stress of going public had sometimes left him making phone calls in the early hours of the morning while lying on the floor like a “starfish”. THG has four divisions. Beauty, which includes THG’s own brands and websites such as Lookfantastic, accounts for about 48 per cent of sales. Nutrition, which includes Myprotein powder, brings in 34 per cent. Ingenuity accounts for just 9 per cent. The remaining 9 per cent comes from personalisation services — for example, THG lets customers put their own text on tins of Quality Street — and the operation of venues such as Hale Country Club in Altrincham, Cheshire. THG turned over £1.6 billion last year and made underlying profits of £151 million, although it recorded negative cash- flow of £208 million as it invested heavily. Moulding, a former lieutenant of Phones4u tycoon John Caudwell, launched THG as a VAT-free CD and DVD retailer in the Channel Islands in 2004. It pivoted towards beauty and nutrition and by 2011, when it bought Myprotein, was turning over £142.4 million. That purchase led to a legal fight with Myprotein founder Oliver Nobahar- Cookson, with each side accusing the other of misrepresenting their finances.

W

hen a recruiter approached Jason Young on LinkedIn about a job with The Hut Group (THG) in early 2016, he was sceptical. Young, an American, was living in Indiana, where he had built and run a manufacturing facility for a microwave pop- corn brand. He had not heard of this fast- growing British online beauty and nutrition retailer, which had sales of about £500 million and wanted to estab- lish a beachhead in the US. THG’s recruiter asked whether he would be interested in helping to set up a manufacturing plant for THG’s Mypro- tein workout powder in Kentucky. Intrigued, Young flew to the UK. He was picked up from Manchester airport in a Mercedes and whisked to THG’s head- quarters, which was then in Cheshire. He met THG’s founder and executive chairman Matt Moulding, who outlined its ambitious growth plans. But it was a conversation with Moulding’s No 2, finance director John Gallemore, that sealed the deal. They spoke while perched on a window ledge overlooking THG’s executive car park, which was rammed with gleaming sports cars. The message seemed clear to Young: this was a company that quickly made millionaires of its staff. He signed up to work on the Kentucky project in May 2016. Little more than two years later, in November 2018, he was fired. Young is one of four former employees in the US now suing THG for breach of contract and wrongful dis- missal. They allege that they were, in effect, sacked after trying to blow the whistle on unsafe working practices at the facility in the small city of Shepherds- ville in Kentucky’s Bullitt County. The four claim that hazardous materi- als were stored and shipped illegally; that THG refused to implement safety meas- ures because of the cost; that it sent UK employees to work at the site in breach of US immigration laws; and that higher-ups at THG told them to manipulate safety audit data to indicate that the plant com- plied with local laws when it did not. They are seeking about $30 million in damages.

THG is defending the case and rejects all the claims. The company says it acted in good faith at all times and did not retaliate against the quartet for reporting any violations of US laws. THG said: “This is a frivo- lous case taken by four disgrun- tled ex-employees who were fired three years ago after a site audit noted breaches of their duties.” The case was filed in Ken- tucky in July last year, two months before THG floated on the stock market at a value of £5.4 billion. Governance quirks — including Moulding’s insistence that he keep a “golden share” giving him greater voting rights than other investors for three years — meant THG was disqualified from a premium listing, under which it would have entered the FTSE 100 index. Even with a less prestig- ious standard listing, THG’s shares shot up by 30 per cent on their first day of trading. It was initially hailed as proof that the London market could attract dynamic tech ventures of the kind found on New York’s exchanges. A year later, THG’s shares crashed amid governance concerns and doubts over lofty promises made about Ingenuity, its e-commerce platform. The Analyst, a research firm, pointed out that very few third-party customers, such as Hotel Chocolat and L’Occitane, actually used Ingenuity as their main e-commerce partner. It said that despite the hype, the “most exciting” part of Ingenuity accounted for just 2 per cent of THG’s annual sales. At the time of The Analyst’s note, THG shares were trading at about £5. They have since tumbled past The Analyst’s target of £2.60 and closed on Fri- day at £1.91, valuing THG at £2.4 billion. Moulding, 49, accepted an £830 million share-based bonus after THG’s market capitalisation stayed above the £7.25 billion mark for a certain period before collapsing. It was promised to him by previous backers such as private equity firm KKR, which sold its entire holding at the float, although it will be

The case exposed the discovery of a fraud that derailed plans for a THG float in 2011. In a special report codenamed Project Hydrogen, auditor PwC found that financial controller James McCarthy had been flattering THG’s profitability on a monthly basis by overstating debtors and stock levels and understating liabilities. A £4.1 million underlying profit for the 2010 financial year had to be revised to a £1.5 million loss. The court also heard how several people in THG’s finance department carried out what they called the “Saviour Weekend” in July 2011 as they tried to salvage the listing. Nobahar-Cookson alleged that they were fraudulently trying to conceal a deep loss for the first half of 2011, although the judge found that the weekend did not involve fraudulent activi- ties. McCarthy and another member of the finance department were sacked. Three people were given final warnings. Finance director Dar- ren Rajanah was placed on gardening leave for almost two months. Although the judge did not find that Rajanah committed fraud, he was said to have been copied into an email chain where McCarthy and others discussed whether they could “frig” a sales record and “create an illusion”. The judge said Rajanah’s behaviour had been “ill advised” and that he must “take some responsibility for an atmos- phere within the finance department which allowed fraud to flourish”. Rajanah was also found to have had a £50, bonus paid into McCarthy’s bank account to hide it from his wife, who he was divorcing. Rajanah still works at THG, as senior vice-president of Ingenuity. The Kentucky case again threatens to shine an unfavourable light on THG’s culture. A former employee said the company had entered America “with no real clear path or strategy”. He said it was run like a “boys’ club” or “fraternity”. “There’s a lot of energy, a lot of bravado. Everybody’s always in the gym — they’re in the gym at 4am and they’re back in the gym at 6pm.” He described Moulding as a “narcissis- tic tyrant”. Andy Duckworth, the former chief executive of Myprotein who helped oversee the building of the Kentucky plant, is said to have been forced out after a marketing presentation drawn up by his team attributed some of the credit for THG’s success to him. The former employee said: “He was pushed out, and it was all because of Matt’s ego — nobody was ultimately going to take credit for the business’s growth but Matt Moulding.” THG said that account of Duckworth’s exit was untrue and that the “boys’ club” description of its culture was “bizarre and damaging”. THG said its three key divisions, accounting for 95 per cent of its sales, were run by women and the major- ity of its senior executive team was female. It pointed out that two of its non- executives were women, including senior independent director Zillah Byng- Thorne, the boss of publisher Future. THG is building a new HQ by Manches- ter airport and now employs 10,000 people globally. Moulding has said that he made 74 members of staff millionaires by giving away shares worth £1 billion after THG’s listing. If discontent continues to rumble, he may yet have to do more.

The beauty and

fitness empire is

under attack from

ex-staff who allege it

presides over a

‘boys’ club’ culture.

Oliver Shah reports

American

exiles trying

to blow

The Hut’s

roof off

It was all about

ego. Nobody was

ultimately going to

take credit for the

business’s growth

but Matt Moulding

ILLUSTRATION:TONY BELL

There’s a lot of bravado.

They’re in the gym at

4am and back in at 6pm

The Sunday Times Business & Money - UK (2021-11-14)

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