Soho House IPO sets high price for entry - Reuters

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A bartender mixes a cocktail in New York City, U.S., March 22, 2017. REUTERS/Brendan McDermid

LONDON, July 7 (Reuters Breakingviews) - Soho House is known for running private members’ clubs that are trendy but hard to join. Its initial public offering in New York is setting a similarly high bar for investors. A mooted $3 billion price tag depends on pulling off a bold global expansion and eventually making a profit. But there are plenty of potential party poopers.

Rebadged as Membership Collective Group, Soho House is a relative stock market novelty. It looks a bit like a high-end leisure group, running clubs for creative types from Miami to Mumbai. But members who pay up to $3,400 a year ensure a more predictable stream of revenue. Some 92% of them stayed signed-up during 2020, even though many clubs were forced to close.

The hoped-for valuation is hard to justify on current financial performance. Soho House has never made an operating profit in its 26-year history. Its EBITDA margin in 2019 was a dismal 3%, while hefty interest payments on its $750 million of debt battered the bottom line.

Prospective investors will therefore need to buy into founder Nick Jones’s expansion plan, which includes opening new venues in places like Austin, Texas, and leasing WeWork-style shared offices to companies. Jones also plans to apply the same approach to The Ned, a club for professionals, and the Scorpios Beach Club in Mykonos.

Jones hopes to open another 16 Soho House “houses” by the end of 2023, taking the total to 46. If its clubs each generate average revenue of $25 million a year, in line with 2019 levels, turnover could reach $1.1 billion. Assume Jones can lift the margin to 20%, then EBITDA would be about $220 million.

At the mid-point of the IPO price range the equity would be worth $3 billion. Throw in net debt of around $400 million, after deducting the IPO proceeds, and the company’s enterprise value would be about 15 times that EBITDA. That’s in line with hotel chain Marriott International’s (MAR.O) valuation based on 2023 forecasts.

Expansion brings fresh challenges in keeping new members faithful and feeling valued, however. Over half of the current members joined in the last five years. Meanwhile, luxury hotel chains can compete by offering members-only access to bars and rooftop pools. Soho House might be an acquisition target. But given that its management and Chairman Ron Burkle call the shots with super-voting shares, investors’ best hope is to enjoy the party while it lasts.

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CONTEXT NEWS

- Membership Collective Group, which operates the Soho House chain of private members’ clubs, said on July 6 it planned to raise as much as $480 million through a New York initial public offering that will value it at up to $3.2 billion.

- The company, backed by Chairman Ron Burkle’s Yucaipa Companies, will issue 30 million shares at a price between $14 and $16 per share. After the listing, Yucaipa will control 58% of the company’s votes through special class B shares, which are entitled to 10 votes per share.

- Membership Collective Group had 119,000 members as of April 4 and operates venues in the United States, United Kingdom, Istanbul, Mumbai and Hong Kong. As of May 30 it had over 59,000 applicants waiting to join.

Editing by Peter Thal Larsen and Oliver Taslic

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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