The Very Group - Found our spot - Positioning
All,
Please find our initiation on The Very Group (Shop Direct) here.
Sarria | The Very Group - Live Discussion
Wednesday, March 19 , 2 pm UK time | 10 am EST
This name has been requested by some clients, but we suspect the focus is not specifically on The Very Group but on related entities within the holding company structure. The Very Group bonds offer 8% yield to maturity, with a potential pick-up on an early sales process. The name is dominated by press reports surrounding its shareholders, the Barclay brothers, and the sale of their other assets, mainly the high-profile UK print media assets, held outside the restricted group of The Very Group.
Investment Rationale:
- We are taking a 5% long position at 98% in The Very Group bonds, which offer us an 8% yield to maturity. This improves further on any early take-out, which is a distinct possibility, given the upcoming maturities of Carlyle’s facilities at VGL Midco Limited, an entity within the series of holding companies.
- There are many reasons to dislike these bonds, but despite this, we strongly suspect the business will be sold and the bonds will be taken out before year-end. An August take-out improves the yield to 11.5% yield due to the pull-to-par impact.
- A failure to sell the business would ultimately lead to Carlyle/IMI taking control of the business. This would lead to a change of control. An amend and extend or other liability management may be contemplated but we fail to see the leverage the new owners would have over the bondholders. MI/Carlyle's facilities are mainly entities outside the restricted group with The Very Group as the only asset.
- Downside is centred on further contraction of its retail sales. The business has a loyal customer base, and our conservative model demonstrates its cash-generative nature. But the leverage of the retail segment, post securitisation interest, is elevated and a further downturn in retail sales will result in a drop in bond prices. A straight refinancing would be difficult without top-line sales stabilising.
Shareholder woes:
- The Very Group stated it remains committed to a refinancing in 2025 and JPM has been appointed to lead this process. This is primarily driven by the Carlyle facilities which mature in November 2025.
- In February 2024, Carlyle and IM announced its funding support to the Very Group. Carlyle provided a £56m loan to The Very Group Limited directly, and a £28m loan to VGL MidCo Limited, which was subsequently lent to The Very Group Limited entity. In addition, Carlyle has provided £50m credit line to The Very Group Limited which is undrawn.
- Previously Calyle provided £280m in loan form to VGL MidCo Limited to repay a Greensill Capital facility.
- IMI's involvement in the The Very Group structure is centred on its lending to other entities connected to the above Media assets. IMI has lent £600m, which is backed by the Media assets (telegraph and Spectator) and another £600m backed by other assets held by the Barclay brothers, including the Very Group. The "media" assets had an option to be converted to equity but this may well be extinguished given the UK government's ban on foreign entities acquiring media assets.
- The proceeds of the Redbird IMI loans were used to repay the Lloyd's banking loans after Lloyds placed LW Holdings Limited in receivership.
- The Carlyle Group, whose loans are at entities senior to the IMI facilities, are advised by Jefferies and law firm Akin.
Operations:
- The Very Group is the largest integrated pureplay digital retailer and financial services provider in the UK. The Very Group (ShopDIrect) has a long history in the UK, operating as a retailer for over 100 years, incorporating a finance arm 10 years later. Originally a legacy catalogue business, it was transformed into a pureplay, integrated 100% digital model.
- The Very Group sells in four distinctive segments: Electrical (45% of FY24 sales), Fashion & Sports (30%), Home (13%) and Toys, Gifts and Beauty (12%). The electrical segment has grown recently, underpinned by a strong performance in computing and gaming. Fashion & Sports declined further in FY24, by 5.5%, due to greater competition. There is a high promotional environment in this segment, with only premium fashion showing any positive growth.
- During FY24, The Very Group had 4.3m active customers, which is relatively stable (down from 4.5m in FY21, the time of the bond offering). On average, the order frequency is c. 4.5x (4.4x
in FY24) with order value up 4% to £157.20.
- Attached to its retail business, The Very Group operate a finance arm, with a debtor book of c. £1.5bn. Very Finance is fully integrated. The debtor book is a key element of the value model,
driving revenue growth and, via credit risk management and low level of bad debt, the additional value from its finance arm. It is financed via a securitisation vehicle, which is 100% owned
by the Very Group. For clarity, the numbers reported are consolidated numbers of both sides of the business.
- Key drivers of the business include:
Active Customer Base: The Very Group grew its active customer base in 2021 by 16% to 4.34m customers. Active Customers remain at 4.3m as of March 2024, marginally down on prior years. The average order frequency was 6.2, with an average order value of £139 at the time of the offering (2021). Order frequency dropped, hitting 4.4x in March 2024, but the average order value has increased due to inflation, reaching £157.20. Customer loyalty is significantly higher for credit customers versus cash customers.
Average Debtor Book: The average debtor book increased by 4.5% to £1.5bn in FY24. This is driven by management and is a key element of the economic model.
Default Rates: Despite the increase in the debtor book, bad debt as % of debtor book has reduced from 6.3% in FY22 to 4.8% in FY24.
Happy to discuss
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk