Bankers Are Finally Welcome at Soho House

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When Soho House Holdings Ltd. opened a members club, hotel and restaurant complex called The Ned in London’s financial district in 2017, it marked a striking break with tradition. The group had snubbed finance types, preferring to draw its members from the fun-loving creative classes — advertising, TV and film folk with large expense accounts and sartorial imagination.

Now it’ll have to be more even welcoming of besuited bankers and portfolio managers, at least for the next few weeks. The company has hired JPMorgan Chase & Co. and Morgan Stanley ahead of a possible stock market listing in New York, according to The Times newspaper.

This might seem a bad moment to list a hospitality business, especially one that serves the hard-hit creative industries. Yet majority owner and billionaire Ronald Burkle hopes Soho House will be valued at around $3 billion.

That’s very ambitious considering the company was valued at $2 billion only a few months ago and its finances weren’t in great shape even before the pandemic. Though members have largely stayed loyal, discretionary food and beverage sales accounted for about half of the group’s 433 million pounds ($602 million) in revenues in 2018, the last year for which full accounts are available. You’d imagine those sales were recently hit hard. The company also has a big pile of debt and lease liabilities and has been unprofitable for years.

I’m no great fan of SPACs, but a listing via special purpose acquisition might be a better way for the company to convince investors that its debt-funded empire, of more than two dozen clubs in places like Los Angeles, Mumbai and Mykonos, will eventually lead to profitability.

Right now, Soho House is under huge strain. Virus restrictions forced the temporary closure of many of its outposts. It had to lay off 1,000 of its 8,000 employees, it halted cash interest payments on a 350 million-pound loan from Permira Debt Managers Ltd. and it negotiated rent holidays with landlords. The company expected to generate only about 5 million pounds of earnings before interest, taxation, depreciation and amortization in 2020, founder Nick Jones told the Telegraph newspaper in November, a level that implies a large bottom-line loss.

The good news is that having been confined to their homes, people will be inclined to spend on having a good time once lockdowns end. Like WeWork, Soho House offers co-working for those who’ve fallen out of love with the office. So I’m sure we’ll hear a lot more talk from Jones about the imminent arrival of the “Roaring 2020s.”

The group has a strong brand and a long waiting list to become a member, both of which encourage loyalty — even during a pandemic. Only 10,000 of 110,000 members froze their memberships, Jones told the Financial Times last year.

Members seem fairly flexible on price too. The company was able to hike membership fees by several hundred dollars in 2017 without prompting an exodus. Still, memberships account for only about 25% of revenue in a normal year. Describing the group as a subscription-type business, in an attempt to gain a loftier valuation, might be a tough sell.

The cost cuts undertaken last year should drive an improvement in margins once the company’s outlets are running at full capacity again. Roughly 90% of revenue was derived from the U.K. and North America in 2018, places that have been relatively quick about inoculating their populations. Management have insisted that overall losses are a function of rapid expansion and that individual sites make money. IPO investors will want to see more evidence of that, as well a clear idea of when the company might finally become profitable.

That’s why I think a special purpose acquisition company might be a better fit than a traditional IPO. Burkle knows plenty about Wall Street’s latest fad, having raised $300 million via his own SPAC vehicle Yucaipa Acquisition Corp. last year.

Soho House is the right size for a SPAC, and the ability to publish financial projections — something that’s not allowed in a regular IPO — would be helpful for a group with such pronounced historic losses.

The vast majority of businesses that have gone public via a SPAC since 2019 are unprofitable or burn cash, according to a recent JPMorgan analysis. WeWork, which scrapped a 2019 IPO when investors recoiled at its financials, is now poised to try its luck listing via a SPAC.

 Perhaps finance types have something to offer Soho House after all.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

©2021 Bloomberg L.P.

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