Mon 18th Mar 2024 - Shares in Soho House jump 20% on reports of takeover offer and chairman’s letter to shareholders Shares in Soho House jump 20% on reports of takeover offer and chairman’s letter to shareholders: Shares in members’ club group Soho House increased 20% in early trading in the US after reports that CC Capital, the investment firm led by former Blackstone executive Chinh Chu, was one of the suitors in talks to take the business private. Reuters reported that talks with CC Capital have been on and off since late last year and that a deal is uncertain. Shares in the New York-listed Soho House climbed 20% to $6.12 on the report but have since dropped back to currently sit at $5.84, giving the business a market cap of $969.2m. Last month, Soho House said it had formed a special board committee late last year to evaluate certain strategic transactions, which may result in it becoming a private company, in a response to a report published by short seller GlassHouse criticising the group. Shares of Soho House were already climbing on Monday before the Reuters report after chairman and largest shareholder Ron Burkle sent a letter to shareholders in which he said he expects to be an owner of the business for a long time, and that he has debated for some time whether Soho House should be a public company. The letter said: “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 five-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 is a unique and really compelling feature of the business model. Public companies always have a tug of war over short term versus long term profits. I’d again emphasise 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 control 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 expensive for a forensic audit that confirmed there are absolutely no issues and took critical management time away from the business. It’s important to note that this wasn’t anyone with knowledge of some non-public fact. On top of all this, management already spends a huge amount of time on public company issues that could be better spent growing and managing the business. I’ve debated for some time whether Soho House should be a public company. To be honest, the biggest argument I have with myself (it’s not solely my decision and many other opinions matter) is that I’ve never had shareholders lose money with me from an IPO of a company I control. My personal belief in the value being created at Soho House is so strong that I’d rather just be patient, but my investing style shouldn’t be imposed onto others. Over time, we’ve had inquiries about taking the company private. As we reported, the board formed a special committee to review any transaction that would require me to be part of the future of the company. To be clear, I want to and intend to be an owner for the long haul, but at this time, I’m not part of a group and haven’t made a bid (although I’m not prohibited). We were shocked Friday when it came to my attention that certain information from the special committee process had been leaked. Neither the broader board nor management have been part of the special committee process, making this potential leak particularly concerning to us, and warranted this statement. To be clear, I’m not part of any bid at this time, but any proposal that may be on the table requires me to roll my shares. Hence the current need for a special committee. In layman’s terms, the process is that the independent special committee is advised by their bankers and lawyers as to the appropriateness and the fairness of any proposal. Then I have to agree to contribute my shares at that value. Then the independent board votes and then the minority shareholders vote, requiring a ‘majority of the minority.’ In summary there are a lot of checks and balances. 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.” New York-based short seller GlassHouse last month published a report criticising Soho House’s accounting practices and expansion strategy, accusing the group of having “a broken business model and terrible accounting” and describing its listing as being “eerily similar” to that of bankrupt company WeWork. On Friday, Soho House reported it doubled adjusted Ebitda in 2023 as it made “significant progress” on improving profitability, with losses narrowing by more than $100m. It indicated a strong pipeline of more than 20 houses, but a focus in the near to medium term on membership and profit growth over house growth. Propel reported on Friday that the number of UK members has increased by more than 22,000 in the last two years, an increase of 46%. Soho House features in the Who’s Who of UK Hospitality, which is one of six databases exclusive to Premium Club members. The latest edition was sent to Premium Club members last Friday (15 March) and features 866 companies. There were 36 updated entries and 11 new companies. The companies, listed in alphabetical order, have their most recent results reported as well as broader information around Ebitda, plans and trading style available. The database merges Companies House information, interviews and other public information to provide an easy to reference and exhaustive guide to the sector. Email kai.kirkman@propelinfo.com today to sign up.