Douglas - pure madness

All,

As fundamental investors we value companies on earnings, assets and other boring metrics, then count the beans and decide if they have enough of them. That’s our toolkit - our hammer. But what if a hammer is not the right tool? We find it surprisingly hard to accept the notion and only one look at Douglas' bond prices suggests that we are not alone. But that’s because Douglas investors are all credit heads.

In an interview with German economics magazine, Wirtschaftswoche Douglas CEO Tina Mueller went so far as to use the acronym: “IPO” when discussing post-Corona plans. Many a management have had lofty aspirations before, but in the interview, she shows a clear understanding of our new post-Corona / post-THG IPO world. Her new strategy is to declare the online business the primary business unit and to align all business processes primarily with the online business and no longer with the store network. A “profitable" store network should then only be considered additional value.

As we previously wrote, the IPO valuation of The Hut Group means that Douglas’ online business is worth more than the company has debt outstanding. Note that THG’s share price has since held up. Douglas' store network, which pre-corona achieved E250-300m EBITDA would come for free and at a distressed 5x multiple would still amount to E1.5bn. But that’s CVC’s value cushion and is not required to cover the debt.

The valuation of THG is not new, but it's very interesting how closely Mueller and CVC have paid attention. Currently, over 40% of German sales are already online, suggesting the time may not be far off when more turnover is generated in the online business than in the store chain - at least in its largest market. Meanwhile, store closures from the pandemic will likely focus on Southern Europe, further shifting the balance towards online. Of course, much remains to be done to grow the international online presence, but Douglas are in pole position and again, that is not needed to cover the 2LNs here.

While lock-downs are propelling online migration, CVC can potentially gain a similar (~50x Online EBITDA + stores business) IPO valuation. But growth rates and valuations should slow down again (normalise) once the pandemic is under control. So CVC should eye an IPO at the very earliest convenience - not on the basis of consolidated revenues and earnings, but on its online story first and foremost. Any delay may help with revenue and earnings in the store chain, but the valuation could drop. Early 2022 seems an ideal target window.

We, therefore, think it is outright madness to even contemplate a scenario where for a little bit of fresh cash for store closure costs and temporary lock-down cash burn CVC would lose this business, or where for the sake of making E300m in a messy restructuring the sponsor would tarnish these kinds of IPO valuations. Pure madness.

We are quite deeply invested in the 2LNs and remain so.

If you are looking for undervalued assets in this market - please reach out.

Wolfgang

PS: Thanks to Bill Gates for the “hammer” analogy.

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2 Stephen Street
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E: wfelix@sarria.co.uk
T: +44 203 744 7003www.sarria.co.uk