Investor Kelso buys small stake in ‘undervalued’ THG

THG CEO Matthew Moulding

New investment firm Kelso Group Holdings Plc said on Tuesday it has bought a small shareholding in online nutrition and beauty giant THG, which it called a “hugely exciting but significantly undervalued” business.

“Kelso is pleased to announce its first investment meeting its investment criteria with the purchase of 5.0m shares in THG at an average price of 54.5p, representing 0.4% of THG,” said Kelso.

THG went public at £5 a share in September 2020 and the stock rose to around £8. However, THG shares have since fallen more than 90% to around 58p — slashing the firm’s stock market value to roughly £750 million — following a disastrous presentation to investors and concerns over the company’s structure, transparency and governance.

Kelso’s shares rose about 18% on Tuesday, with THG’s shares up about 6%.

On Monday, Kelso Group announced the appointment of Nigel Knowles, CEO of international law firm DWF Group, as Kelso Group chair.

Kelso said it was established in 2022 to “identify, engage and unlock trapped value in the UK stock market.”

The investment firm added: “Kelso’s strategy is to invest in situations where there is an anomaly between the intrinsic value of a company and its stock market valuation.

“Kelso will offer its assistance to companies to help unlock that value. Kelso will, in particular, seek opportunities where it believes the value of the sum of the parts of a business is significantly greater than its current value …”

Kelso said it believes that current market conditions are such that there are situations where UK listed companies’ valuations are not appropriately matched to their underlying intrinsic value.

“There may be instances where Kelso itself could be used as a vehicle by an undervalued company to spin off a subsidiary into its own listing,” said Kelso.

“Such a transaction would undoubtedly constitute a reverse takeover for Kelso.”

Kelso Group added in its stock exchange statement: “Matthew Moulding the THG founder and CEO has built a business with true global scale in two global growth sectors of Nutrition and Beauty employing around c.8,000 employees with 18 fulfilment centres shipping to 195 destinations.

“On 17 January 2023, THG announced record revenue for the year to December 2022 of £2.25bn, albeit with a reduced core adjusted EBITDA on a continuing basis of £100m, following EBITDA of £161m in FY21 and £151m in FY20.

“However, we believe this reduced EBITDA is temporary and will be enhanced with operational improvements and not least from deflation in certain input prices, for example in whey.

“We also regard THG’s comment that Ingenuity is ‘in advanced discussions to provide long-term software solutions for several significant enterprise clients’ as positive news.

“Kelso believes that the THG Board’s actions, through the new chairman Charles Allen, Lord Allen of Kensington CBE, to improve governance and expand the executive team will pay dividends in 2023.

“We think that the recent appointment of Damian Saunders as CFO, previously a senior partner at Deloitte, as announced on 24 January 2023, is positive, especially given his knowledge of THG having been involved with the ‘separation’ project which formally gave the three main divisions their own corporate independence.

“Kelso believes that the separation provides THG with significant strategic optionality.

“The potential to separate parts of the business could provide THG shareholders with significant upside from the valuation of the business today.

“Kelso believes that the current stock market value does not reflect the underlying value of the sum of each of the main THG divisions.

“In particular, Kelso believes that the Nutrition business, which incorporates the MyProtein and MyVegan brands, could alone be worth in excess of the entire current market capitalisation of THG.

“This is evidenced by the valuations of deals in that particular sector in the last few years, caused in part by the shift in consumption away from chocolate and sugar to health and nutrition, a trend which we believe will continue.”

Kelso CEO John Goold said: “Matthew Moulding, a British entrepreneur, started THG from scratch in 2004, which has grown to over £2.0bn of revenue, employing c.8,000 employees the majority of which are in the UK.

“This transition from entrepreneurial start up to a large listed corporate is never easy but we think THG is now putting in all the building blocks to achieve the success it deserves.”