Exclusive offering: A file photo of part of the interior of Soho Mews House in London. Soho House took a financial hit during Covid-19. — AP
AFTER a volatile three-year charm offensive, a hungover and disillusioned Soho House & Co is turning its back on Wall Street. It’s fair to say there’s no love lost.
Last Thursday, the international members-club chain confirmed receipt of a buyout offer from an unnamed third-party consortium valuing it at around US$1.75bil, or more than one-third less than when it went public in 2021.
After making no secret of his frustration with the British firm’s dismal valuation and his interest in taking the company private, billionaire executive chairman Ron Burkle, who’s the largest shareholder, is supporting the bid – which represents a juicy 83% premium to the prior-day closing price. (The deal would involve Burkle, his Yucaipa Companies and other significant shareholders rolling over their equity.)
More than a decade after a Soho House in New York’s Meatpacking District purged hundreds of members to regain its cool – there were too many suits – the group is effectively purging its minority shareholders and presenting them a token parting gift.
While an independent committee will evaluate the offer, I’d be surprised if it was turned down as happened in May when another bid at a “substantial” but unspecified premium was rejected.
A publicly traded private members’ club was always an uncomfortable match, and Soho House never completely resolved the tension between promising exclusivity and good value to members while delivering growth and profits to investors.
Until last week the shares were languishing around 65% below the initial public offering price. European companies that increasingly view a US listing as a can’t-lose ticket to a higher valuation should pay attention: Much like a banker applying for membership at notoriously sniffy Soho House, you might just end up being ignored.
The private members club went public at US$14 but never won over public market investors. Now its majority-owner Ron Burkle is recommending a US$9 per share takeover offer. I’m no Soho House hater – its properties are often highly attractive.
But I’ve long been sceptical about Soho House as an investment. The group has 45 venues and boasts more than 200,000 members but has never reported an annual profit in its near 30-year history; meanwhile, net indebtedness is high at around five times the adjusted earnings before interest, tax, depreciation and amortisation it expects to generate in 2024.
Those borrowings include almost US$650mil of senior secured notes maturing in 2027, which were subscribed by funds managed by Goldman Sachs Group Inc, and incur more than 8% interest (most of that interest expense is paid “in kind” by accruing more debt).
Like other hospitality businesses, Soho House took a financial hit when its venues were shuttered during the Covid-19 pandemic – discretionary food and beverage sales account for more than 40% of revenue – and a chunk of the roughly US$400mil of net initial public offering (IPO) proceeds went toward paying off a US$100mil revolving credit facility.
In 2021, the chain rebranded as Membership Collective Group in a cynical attempt to highlight its recurring revenue from patrons’ annual fees. But hopes that investors would award it a tech-like valuation multiple were dashed, and it reverted to calling itself plain old Soho House last year.
Adding new houses and signing up more members boosted the top line, but customers began to complain of overcrowding and poor service, forcing the group to pause new memberships in London, New York and Los Angeles last year.
Worse was to follow when short-seller GlassHouse Research published a report criticising the company’s accounting and persistent lack of profitability. Soho House said the report contained “factual inaccuracies, analytical errors, and false and misleading statements”.
New chief executive officer Andrew Carnie, who succeeded founder Nick Jones in 2022, has steadied the ship by focusing on getting the basics right: He’s added accounting staff and made sure members are greeted warmly, for example. Prices have increased – an all-access US membership can cost US$5,200 a year compared with US$3,400 at the time of the IPO – and costs are under better control.
The group has also slowed its expansion: It now aims to open around three new houses a year – compared with a previous target of as many as 10.
The latest addition, Soho Mews House in London’s Mayfair, feels like a riposte to those who say the chain has lost its lustre and is full of Gen-Z posers – membership is by “invitation only” and laptops are banned.
The upshot is that Soho House managed to report a profit (gasp!) in the latest quarter, albeit US$200,000 of net income isn’t much to boast about.
However, this pivot away from growth to improving the bottom line hasn’t been rewarded.
Until last week, Soho House was thinly traded – Burkle, Jones and entrepreneur Nick Caring together control around 75% of the share capital, while Goldman affiliates own 8% – and the stock has missed out entirely on the boom in US equity markets since October 2022.
Recommending a takeover bid at such a depressed level is effectively an admission of defeat for Burkle.
Though it’s still a better outcome than at eCommerce firm Signa Sports United NV, which filed for insolvency in 2023, having gone public via a Burkle blank-check firm Yucaipa Acquisition Corp in 2021 at a US$3.2bil valuation.
Still, they say all the cool kids are in private markets these days. Always self-consciously on-trend, perhaps Soho House will have more fun there. — Bloomberg
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. The views expressed here are the writer’s own.
