It has been a disappointing few years for those in the City who make a living from bringing companies to the stock market.
Things were tough enough in 2019, which was the worst year for stock market flotations in a decade, with just 35 initial public offerings (IPOs) taking place during the year.
Of those, only a couple – Trainline and Network International – achieved a valuation of £1bn.
Then came COVID-19 . During the first half of the year, there were just nine IPOs, raising a mere £666m between them. That’s compared with £3.2bn for the whole of 2019.
So the spectacular stock market debut on Wednesday of The Hut Group (THG), the e-commerce specialist, will have provoked widespread relief in the City – and not just among the bankers at Citigroup, JPMorgan, Goldman Sachs and Barclays, the brokers at Numis, Jefferies and HSBC and the advisers at Rothschild who worked on the IPO and who will have shared an estimated £50m in fees.
It will be taken as a signal that there is still life in the London IPO market.
Shares of Manchester-based THG – which owns cosmetics brands like Christophe Robin, ESPA and Eyeko and which sells third-party branded products such as those made by Glossybox and LookFantastic – were priced at 500p but quickly surged to a first-day premium.
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THG's IPO today demonstrates the phenomenal level of demand for high-growth technology companies in London. Learn more about the largest e-commerce IPO in Europe to date. https://t.co/II7dvcmXCw #IPO #technology #publicmarkets @thehutgroup pic.twitter.com/imoaE9YdpN
— London Stock Exchange (@LSEplc) September 16, 2020
At one point, they were changing hands at 658p each, valuing the company at just over £7.1bn.
THG raised £920m net of expenses in what was the biggest flotation in the London market since that of Royal Mail in 2013.
The size of THG’s stock market valuation would have catapulted the company straight into the FTSE 100 had it opted for a premium, rather than standard, listing.
If the valuation achieved was pretty dramatic, so was the sum raised by THG’s existing shareholders, who collectively received £961m by selling down their stakes.
Chief among them was Matthew Moulding, the co-founder, chairman and chief executive of THG, who raised £54m – although that sum is being reinvested as part of a restructuring of the group’s property portfolio that will see him become its landlord.
That sum, however, is dwarfed by the shareholding Mr Moulding will retain in the business and which will confirm his status as a billionaire.
Among the others sharing in the sale proceeds will be some of the UK retail sector’s best-known figures, with Sir Tom Hunter, the founder of the Sports Division chain and former owner of House of Fraser, collecting an estimated £52.5m and retaining a shareholding worth more than £100m. Sir Tom was an early investor in THG having acted as a mentor to Mr Moulding when he launched the business 16 years ago.
Meanwhile, Sir Terry Leahy, the former chief executive of Tesco, raised £17m from selling shares, but will retain a stake in the business valued at some £68m at the offer price. Those who regularly criticise the levels of executive pay in British businesses may note that Sir Terry has probably earned more from his involvement with THG than he did during his entire 32-year career at Tesco.
Others who made substantial sums selling shares in the IPO included Terry Green, the former chief executive of Debenhams; Angus Monro, the former chief executive of Poundstretcher’s parent company; the wealthy Lewis family, which owns the River island fashion chain and Dominic Murphy, who previous ran the private equity firm KKR’s business in the UK.
During the run-up to the IPO, there has been intense debate over THG’s corporate governance, in particular the fact Mr Moulding was both chairman and chief executive of the company – an arrangement usually frowned upon in UK listed companies.
There was also disquiet among some investors about Mr Moulding’s incentive scheme – which could make him £700m – and also at his retention of a so-called “founder’s share” that would enable him to block unwanted takeover bids for the next three years.
While the corporate governance wonks were unhappy about that aspect of THG, there has also been debate about whether the shares were being overpriced, although today’s first-day trading would suggest the opposite.
There may have been some nervousness among fund managers at the risk of missing out on another Ocado.
But there was also much enthusiasm at THG’s role as a third-party logistics and infrastructure provider to some of the biggest consumer brand owners in the world.
THG Ingenuity, the company’s end-to-end e-commerce platform, not only powers THG’s own business. It also offers the likes of Johnson & Johnson, Coca-Cola, Nestle, Procter & Gamble and Walgreens Boots Alliance what THG describes as “an end-to-end proprietary software solution required to operate and scale retail brands, and a suite of in-house consultative and management services across trading, marketing and brand strategy”.
That was enough to make big names in fund management, including Blackrock and Janus Henderson, want to invest.
James Bevan, chief investment officer at the fund manager CCLA, told Sky News: “Fundamentals suggest [the shares] are going to have difficulty making progress from the current heady levels but we should all congratulate them on getting an IPO away in this extremely difficult environment.
“The amount of net issuance has been very small and there’s been a rising tide of people wanting to buy back shares rather issue shares.”
Certainly, investors appear to have been relatively relaxed about Mr Moulding’s “founder’s share”, an arrangement comparatively commonplace in the United States – at companies such as Snap – but less so here.
The fact THG has floated so successfully may help overcome opposition to other companies taking a similar approach in future. There is also an argument – topical in light of the controversy surrounding the sale of the chip designer Arm Holdings this week – that such arrangements may even be desirable if they help promote stability on the shareholder register or reduce the chances of some shareholders snatching at short-term profits rather than taking a longer term approach.
So this has been not only the biggest IPO in seven years. It has also been one of critical importance to the City as it seeks to convince entrepreneurs like Mr Moulding to bring their businesses to market.
Meanwhile, although there has been a dearth of new issues, it is not to suggest that corporate finance departments in the Square Mile and Canary Wharf have been sitting around during the COVID-19 crisis.
As companies rushed to issue debt or to raise capital by selling new shares, in order to shore up their balance sheets and tide them through the crisis, banks were kept very busy.
Dealogic, the data provider, suggests that the ECM (Equity Capital Markets) desks of UK banks reaped fees from UK equity deals of $172m in April, May and June alone.
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