Sharecast - THG (LON:THG) announced last month that it had received a highly preliminary and non-binding indicative takeover proposal from Apollo. The PE firm now has until 15 May to either announce a firm intention to make an offer or walk away.
But Bloomberg Intelligence said it seems unlikely that THG will accept a takeover bid from Apollo and for the latter to make a return, based on its sum-of-the-parts valuation, which is below any acceptable scenario for THG shareholders.
"This makes us question the viability of Apollo's takeover intentions," it said.
Bloomberg said in the research that THG may be 30% more valuable broken up.
"THG's valuation suggests it trades at a 30% discount to the sum-of-the-parts," it said. "Using peers' comparables for Beauty (0.8x 2023 EV/sales online specialists average), Nutrition (1.9x EV/sales at 50% discount to nutrition specialists) and Ingenuity (1.8x 2023 EV/sales - with the Commerce part at a 30% discount to application-software peers and Infrastructure in line with online specialists), we get a premium valuation of £2.7 billion.
"Structural beauty and nutrition sector growth and low profitability are propounding the case for a breakup."
Bloomberg said the nutrition category is in line for compound average sales growth (CAGR) of 8.3% in 2022-27, ahead of 5.9% for sports nutrition, according to Euromonitor. Beauty could quicken if online resumes its structural growth, with Beauty e-commerce seen expanding at a 5.1% CAGR in 2022-27, it added.
It also said that THG and Apollo are unlikely to agree on price. It argued that the PE firm’s offer would need to have a substantial premium - above 157% to the 14 April closing price - for THG to even consider selling, given prior bids were rejected.
"Our sum-of-the-parts valuation suggests the offer is below the lower-end scenario, implying Apollo wouldn't see a profitable exit," it said.
"THG shareholders could consider a bid at the higher-end scenario, with the stock price down 88% from its peak (80% from the IPO)," it said.
"The THG board has the ability to block the bid, with the Moulding family holding about 26% (listed and unlisted) of the shares and Sofina about 9%. In addition, CEO Matthew Moulding retains his golden share until September, granting him the right to veto a takeover."
Bloomberg also pointed out that last year's unanimous rejection of Belerion Capital's 170-p-a-share takeover by THG's board underlines management's conviction that the market has mispriced its controversial Ingenuity division.
The board said at the time that the bid significantly undervalued the company, despite a 46% premium to the pre-offer price.
"Management says Ingenuity is its key revenue and profit driver, yet the lack of visibility on how the segment could achieve critical scale has evaporated what was a £4 billion valuation at IPO and led the market to assign the unit an implicit zero value," Bloomberg said.
It added that Japan’s Softbank also lost conviction in THG's fundamental value, when it sold its 8% stake in October 2022 for 39p a share, taking a £450m hit.
At 1330 BST, THG shares were down 15% at 98.98p.
