Soho House Has 20 Billion Reasons to Envy WeWork

(Bloomberg Opinion) -- At Soho House, anything that looks too much like hard work feels a bit frowned upon: mobile phone calls are prohibited in parts of the club, keeping its cooler-than-thou patrons focused on dropping cash in the bar and restaurant.

Contrast that with WeWork, where being glued to your phone orcomputer is almost the point and the free coffee fuels a buzz of puritanical productivity.

Soho House & Co, majority owned by billionaire Ron Burkle's Yucaipa Cos., probably hopes you won't get too hung up on these differences, though. Thanks to the largess of Softbank billionaire Masayoshi Son, WeWork is now valued at $20 billion and might soon raise money at a $35 billion valuation.

For Soho House, which opened its first members club more than two decades ago, this must be a bit galling. The British company was already building physical hubs for the world's creative classes when WeWork boss Adam Neumann was still a teenager.

It might not be too late for some of WeWork's sparkle to rub off on Burkle's chain of private members clubs, however: while an IPO doesn’t appear imminent, judging by recent comments by the company, it remains an option for the future. 

Soho House Has 20 Billion Reasons to Envy WeWork

That might explain why Soho House has been talking up its WeWork-like credentials lately. The company now has 71,000 paying members, most of whom shell out 1,650 pounds (or more in the U.S.) for the right to visit all the group's international sites. As Soho House puts it, it has a “membership subscription model.”

Famous for discouraging applications from corporate-types, and bankers in particular, Soho House is also branching out into co-working. It already has such a space in Shoreditch, East London, and plans to open more in Los Angeles, New York and Chicago.

Soho House's latest full-year accounts, filed with U.K. Companies House, reveal the similarities with WeWork don't end there – and that might not be such a good thing.

Like WeWork, whose financial statements I dissected here, Soho House has some pretty large financial liabilities, doesn't generate free cash flow and has a taste for somewhat flattering accounting adjustments.

The group made a 62 million-pound loss last year, which it attributed to rapid international growth. But that's only half the story: it's also spending plenty on rent, staff and servicing its large debts.

I calculate the company had about 344 million pounds ($448 million) of net debt at the end of December and a further 592 million pounds of operating lease obligations. The group generated just 3.5 million pounds of net operating cash flow in 2017 (after interest payments), while free cash flow was a negative 33 million pounds. The company also has negative net assets.

Of course, Soho House would prefer you focus on less discomforting metrics such as “adjusted earnings before interest, taxation, depreciation, amortization, foreign exchange, new site development costs, profit on disposal of fixed assets and joint venture undertakings, non-cash rent and other exceptional items.” These totaled 50.5 million pounds last year.

While its adjusted-ebitda calculation is far less aggressive than WeWork's rightly lampooned “community-adjusted Ebitda” (essentially, profit before basic expenses), it won't really help Soho House pay the bills. Only cash does that.

To be sure, there remain some pretty big differences between the two companies. More than 90 percent of WeWork's revenue comes from membership fees, while more than half of Soho House’s comes from discretionary food and drink purchases, and hotel stays. 

There's an argument that Soho House's customer base is stickier. As I’ve argued, some of WeWork’s freelance clients may be tempted to quit during an economic downturn to save money, and there’s little to stop them. However, Soho House hasn’t lost more than 5 percent of its members, even during recessions. (Having gained a coveted place, they are probably disinclined to navigate the picky selection process a second time).

They’re also getting comparatively decent value for money. For less than 140 pounds a month, Soho House members can often use a gym and pool. WeWork’s genius was realizing that millennials will pay upwards of 200 pounds a month for the right to share a desk.

Still, if Soho House hopes to achieve its own multi-billion dollar valuation one day, it will, like WeWork, need to attract capital providers with a high tolerance of red-ink. If Burkle can't persuade public markets to bite, perhaps he should give Son a call.

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.

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