IPO Report: Soho House is going public: 5 things to know about the elite membership club before its IPO

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Soho House wants investors to join the club — in a manner of speaking.

The private members’ club, which operates clubs, hotels and other venues that cater to the glitterati around the globe, has filed to go public after nearly three decades since the program started in London back in 1995.

Soho House filed under the name Membership Collective Group Inc. and plans to trade on the New York Stock Exchange under the symbol “MCG.” The company is currently planning to sell 30 million shares of its Class A stock, with the target price range of between $14 to $16 a share. Altogether, it could raise up to $480 million in the IPO, which would raise to the company’s valuation to over $3 billion.

There are eight underwriters of the deal, led by J.P. Morgan
JPM,
+0.79%
,
Morgan Stanley & Co.
MS,
+2.19%

and BofA Securities
BAC,
+0.48%
,
and including Goldman Sachs & Co.
GS,
+1.75%
,
HSBC Securities
HSBC,
-0.38%
,
Citigroup Global Markets
C,
+0.10%
,
William Blair & Company, and Loop Capital Markets.

The company is looking to go public at a time that the Renaissance IPO exchange-traded fund
IPO,
-1.17%

has slipped 0.6% over the past three months as of Monday morning trading, while the S&P 500 index
SPX,
+0.24%

has gained 6.0%.

Originally intended as a space for people in the creative industries to schmooze, Soho House has grown to have more than 119,000 members. It operates 30 “houses” globally as of July 4, in addition to a handful of other locations and digital channels.

The company only owns two properties in the U.K. and one in the U.S., and has partial ownership in three other locations around the world. The rest of its homes are leased, though some of its lease agreements include profit-sharing arrangements.

Here are five more things to know about Soho House before it goes public:

The company has never made a profit — and has a large debt load

In its prospectus, Soho House revealed that it has never turned a profit in the company’s history. “We have incurred net losses in each year since our inception, and we may not be able to achieve profitability,” MCG warned, as one of the offering’s risk factors.

In the fiscal year 2020, the company incurred a net loss of $235 million. Granted, the pandemic had a negative effect on the company’s business, and MCG said it took steps to reduce discretionary spending in response.

As an explanation for why it’s never been profitable, MCG said it has “invested significantly in efforts to open new Houses, launch and grow complimentary businesses, hire additional employees, and enhance our membership experience.” It warned that ongoing efforts to boost its membership could end up proving more expensive than anticipated.

Meanwhile, the company has a significant debt load. Its total liabilities as of the beginning of April were $2.2 billion, of which $1.8 billion were long-term obligations. The terms of the company’s outstanding debt, however, do restrict the company’s ability to engage in mergers or declare dividends, Soho House warned. A portion of the proceeds of the IPO will be used to repay the company’s outstanding debt.

MCG lacks experience with GAAP accounting standards

In audits of their consolidated financial statements for the past three fiscal years, company management and an independent accounting firm “identified material weaknesses” in the company’s internal control over its financial reporting. Among the issues they highlighted was a “lack of a sufficient number of personnel with an appropriate level of knowledge and experience in the application of GAAP, commensurate with our financial reporting requirements,” the company noted in the prospectus.

GAAP refers to generally accepted accounting principles issued by the Financial Accounting Standards Board.

The company also warned that policies related to the review and supervision of its accounting “were either not designed and in place, or not operating effectively.”

It attributed this situation to the fact that it is not currently required to comply with the Sarbanes-Oxley Act, legislation that aimed to reduce investors’ exposure to fraudulent financial statements. MCG said it has hired external advisers to provide assistance in getting the company up to speed vis-à-vis GAAP reporting. It cautions though that should it face continued accounting issues it could lose investors’ confidence.

It managed to retain 92% of its members amid the pandemic

As Soho House Chief Executive and founder Nick Jones put it in a letter that accompanied the prospectus, MCG is “nothing” without its members. That makes member retention key to understanding the company’s success — and on this metric, MCG has proven resilient over the past year.

Between 2016 and 2020, the annual Soho House member retention rates have averaged 94%. Notably, 92% of the club’s members opted to retain their affiliation during fiscal year 2020 even though the physical locations were closed due to the pandemic. MCG did issue credits, however, to members for the equivalent value of the time the physical locations were closed during the pandemic. Nevertheless, the company received more than 30,000 membership applications during that time, and it boasts a 59,000-person waiting list of applicants.

“With virtually no marketing or sales costs associated with acquiring new members, we have been able to grow our membership by a 16% compound annual growth rate (‘CAGR’) between fiscal 2016 and 2020, while expanding our Membership Revenue at a 24% CAGR during the same period,” the company noted.

Looking ahead, the lifestyle changes spurred by the pandemic could end up benefiting Soho House. The shift to remote working and away from corporate offices could increase the value of membership for white-collar workers seeking out social spaces. “We believe this will create an even greater demand for curated communities that can grow and thrive in a more deliberate environment,” MCG argued.

Brexit looms over the company still

It’s been roughly 1.5 years since the U.K. left the European Union — and with so many of the after-effects of Brexit still yet to be determined, investors may have reason to approach MCG with caution. As the company advises, it maintains operations in both the U.K. and the EU. The ongoing negotiations between the two presents a risk.

Plus, now that the U.K. must renegotiate global trade agreements on its own, the company “may also face new regulatory costs and challenges,” according to the prospectus. One big risk: If Brexit ultimately makes it harder for EU nationals to enter, exit and work in the U.K., that could make it harder for the company’s British locations to recruit staff.

The company’s current owners will maintain control

Nearly 10 years ago, private-equity firm Yucaipa Companies, which is owned by Ronald Burkle, bought a majority stake in the company. When MCG goes public, it will be controlled by a voting group that includes Yucaipa.

Soho House’s existing shareholders will exchange their current equity interests in the company for shares. Yucaipa will own roughly 61% of the Class B shares, which are entitled to 10 votes per share. This will give it a majority of the voting power in the company.

Over time, if the so-called voting group sells most of its stake to the point where it owns less than 15% of the company’s total outstanding stock, then those Class B shares will automatically convert into Class A shares that receive one vote per share. Even then, this group of shareholders will have rights to certain board nominations if it still owns at least 9% of the company’s stock.

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