In today’s financial news, we’re focusing on Soho House & Co Inc., an intriguing player in the hospitality industry. Recognized globally, Soho House operates a unique membership platform offering both physical and digital spaces where a vibrant community of members can collaborate, socialize, and innovate. With a notable presence spanning the UK, North America, Europe, and beyond, Soho House has a robust portfolio including around 42 Soho Houses, nine Soho Works locations, the Scorpios Beach Club in Mykonos, and its lifestyle brand, Soho Home. Currently, the company’s stock stands at approximately $1.53 billion, with shares priced at $7.87 each.
Turning our attention to Soho House’s shareholder dynamics, it’s noteworthy that Third Point, a well-known activist hedge fund led by Dan Loeb, holds a 9.89% stake in the company with an average cost of $7.64 per share. Third Point is famous for its strategic activism, shaping modern shareholder advocacy with efforts to secure board representation in major firms like Disney and Baxter. Although renowned for its once-infamous “poison-pen” letters, Third Point now persuades through strategic argumentation.
The latest development in Soho House’s journey is Third Point’s letter on January 29th. The letter supports Soho House’s consideration of going private but criticizes the transaction process, particularly a deal involving the board chairman. Third Point argues that other qualified investors in the hospitality industry might offer a better price.
Soho House, which launched its IPO in 2021 under the name Membership Collective Group, initially valued at $2.8 billion, has seen revenue soar from $561 million to $1.2 billion while also improving earnings before interest, taxes, depreciation, and amortization to $99 million. Unfortunately, the stock price plunged from $14 to below $5 as of mid-December. Despite these fluctuations, Soho House benefits from an appealing recurring revenue model and a considerable membership waitlist, although new locations can initially incur losses before achieving profitability.
On December 19th, Soho House disclosed an acquisition offer of approximately $9 per share from a third-party consortium, contingent on influential shareholders like Executive Chairman Ron Burkle and The Yucaipa Companies rolling over their stakes. This announcement boosted shares by 47% from the previous day’s close of $4.91. The details remain scant, but it’s possible Burkle’s significant share and voting power may lead to his control of the firm if it goes private.
Dan Loeb’s response, through a January 29 letter, praised the pivot to private ownership but sharply criticized the board for not ensuring a transparent sale process that maximized shareholder value. Loeb expressed concerns about a possible “sweetheart deal” favoring Soho House’s chairman and insisted on a competitive sales process to explore better-qualified buyers in the hospitality sector. He also highlighted that transactions with controlling shareholders are subject to stringent legal standards, potentially exposing the board to liability.
In essence, Third Point isn’t merely seizing an activist opportunity but remains a stakeholder determined to ensure value maximization for all investors. Their initial $40 million stake, now worth $43 million, underscores their commitment. For Loeb and his team, activism is more than financial gain; it’s a matter of principled investment standing against shareholder disadvantage.
The situation hints at poor corporate governance, perceived as negotiating a low-ball sale with the largest shareholder. Yet, Ron Burkle and the board members aren’t painted as villains—perhaps more as executives unaware of their responsibilities amidst vote control dynamics. Now, only three likely outcomes remain: Burkle increases his offer towards initial IPO levels, alternative buyers emerge prompted by Third Point’s involvement, or potential legal action unfolds against Soho House and its directors. Despite this, we anticipate the board, guided by savvy advisors, will ultimately propose a fair acquisition bid if Burkle’s intentions are genuine.
Third Point continues to evolve as an investment powerhouse, leveraging respect and reasoned arguments to drive their campaigns. This goes beyond typical activism; Loeb’s commitment reflects his intention to safeguard the interest of Soho House stakeholders, ensuring they’re well-valued in any prospective transition.
Ken Squire, writing with authority, is the founder of 13D Monitor, a key resource on shareholder activism, and runs the 13D Activist Fund, which invests in active 13D portfolios.
