Another one shared by a reader and similar to 23andMe, Soho House (SHCO)(~$1.5B market cap) is a 2021 vintage IPO that failed to live up to lofty expectations and now after receiving some bad press and investor skepticism, management along with an unnamed consortium want to take it private. Seems to be a mini-trend (MAPS is another one that was shared).
Soho House is a private social club that was founded in 1995 in London by Nick Jones (he still owns 5.2% of the company, presumably part of the go-private transaction), it now has 45 social clubs around the world, their growth strategy is to target opening 2-4 houses per year. The clubs (~$4800/year dues) have a fashionable bend to them, cater to younger creative types rather than a stodgy country club crowd, many of the clubs have rooftop pools, gyms, bars, other amenities that young professionals enjoy. The company has expanded to some ancillary business lines like beach resorts and even furniture sales. Soho House counts around 200+k full members with another 100+k on the waiting list. But this business does have its negatives, its hard and costly (heavy maintenance capex business) to keep up an exclusive luxury image and goes counter to the grow story that was pitched during the IPO.
Back in 2012, billionaire media/consumer investor Ron Burkle bought a majority stake in the company via his Yucaipa private-equity vehicle. After taking the company public, Burkle remains the Chairman of the Board and owns ~47% of the stock, plus more of the vote due to super-voting Class B shares (the publicly traded stock is Class A). Burkle is a pretty eccentric guy, he reportedly has ties to some Hollywood scandals, bought Michael Jackson's Neverland Ranch and Bob Hope's Palm Springs house, also owns a minority stake in the Pittsburgh Penguins among other private investments. Soho House likely has some vanity and/or social identity appeal for Burkle; it must be fun to be the owner of Soho House and socialize with their celebrity clientele.
Last February, the company came under fire when GlassHouse Research published a short report with a target price of $0. The primary arguments were persistent unprofitability, broken growth story, aggressive depreciation schedules and rising debt levels. Following the report, the company put out a press release announcing they previously had formed a special committee to "evaluate certain strategic transactions, some of which may result in the Company becoming a private company." Then a couple weeks after (3/18/24), Ron Burkle published an open letter to shareholders:
Dear Shareholders
This is my first note to shareholders since we bought control of the company over a decade ago.
With all that’s gone on recently and my understanding that there has been leaked confidential information from the special committee process, I thought I’d proactively share my thoughts with you directly in the event confidential information is indeed leaked.
I’ve made hundreds of investments in my life, but none with a business model I like better than Soho House. It’s hard to read that we aren’t profitable when our Houses are very profitable and create tremendous long-term value as an in-place network. I feel the real focus should be on mature Houses that are in their second 5-year period of their growth curve, when the profitability and durability of the units really kicks into gear. With approximately half our Houses still less than five years old, we have substantial embedded value that will grow as those Houses mature, even before adding a single new House. Our post five-year Houses contribute on average 35% plus House-Level margin, with some of our oldest Houses well above that, making the network more valuable with time. This a unique and really compelling feature of the business model.
Public companies always have a tug of war over short term vs. long term profits. I’d again emphasize that this (to me) should be about value creation more than anything. Today Soho House is a public company. The Board and its affiliates alone controls approximately 75% of the stock, there aren’t many shares in the public’s hands. We have bought back so much of the small float that at today’s stock price the company can almost go private without any of us writing a check.
When we went public I believed the market would reward growth, but it seemed to quickly switch to rewarding free cash flow and profit over our top-line growth. So at this point in time we have all the costs of being a public company with few benefits. The recent negative write up caused the company to have an outside audit firm be hired by an independent law firm. It’s expensive to be a public company, this year it will be even more for a forensic audit that confirmed there are absolutely no issues and took critical management time away from the business.
...
There has always been a lot of investor interest in Soho House, and now is no exception. It is one-of-a-kind. It’s not a hotel company and it’s not a food and beverage company. It’s a membership company with a lot of demand and very low attrition (which provides a large and growing base of recurring revenues in the multiple hundreds of millions).The public market doesn’t seem to understand or fully appreciate the value of Soho House, and the interest from the special committee process has shown private buyers may be willing to step-up and close the gap. However, it’s not for me to opine on the fairness or the appropriate value of the company’s stock, especially if I am not intending to be a seller.
In closing, given the mere potential of leaked information involving the special committee process, I wanted to go the extra step to share with you directly how I see the Company, any proposal and the process.
Sincerely,
Ron Burkle
Despite the usual complaints about being public and the strategic process, Soho House announced in May, it was unable to come to agreement with the third party despite the offer "reflecting a substantial premium over the current trading price". The special committee was dissolved, process over.
However, six months later in December, alongside a delayed Q3 earnings (to make things even more murky, this company has some accounting / controls issues) announced that a new third-party consortium offered $9/share and importantly, had the support of Burkle and his affiliates to roll their equity interest into the go-private transaction.
The offer, which is supported by Ron Burkle and Yucaipa, was the result of a thorough strategic review undertaken by Yucaipa and its financial advisors to enhance shareholder value, as Yucaipa believes the inherent value of the Company is not reflected in its current share price.
Given the strong language and management/board's 75% ownership block, seems like this is the best that minority shareholders can hope for here. The accounting is extremely convoluted making it hard to value, insiders clearly have an advantage and this could be a take under. But shares trade for $7.60/share, offering ~18% upside to the non-binding offer. Management isn't really incentivized here to promote a stink bid (although, I don't like that the third party consortium isn't named), there is a share buyback plan in place, management hasn't been selling into it, why would they artificially raise the price? Absent the stock trading a premium, seems like the natural course here would be for management to eventually squeeze out minority shareholders as Burkle suggests in his letter.
Unlike 23andMe, this is an actual business and not a science project, reasonable people can debate how much it is worth, but it doesn't have a shot clock on it in the same way. Less upside, but it seems reasonable that the 75% ownership block finds a way to get this out of the press and public eye which can't be good for business.
Disclosure: I own shares of SHCO
