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Soho House has long styled itself as a desirable hang-out for creative types seeking to distinguish themselves from boring old City suits. But with a $2.7bn buyout set to end its dismal stint in public markets, it looks like the finance crowd has managed to elbow its way into the members-club operator’s exquisitely appointed lounges after all.
True, the acquisition — which values Soho House at a punchy 16 times its expected ebitda this year, according to S&P Capital IQ — is creative in its way. For one, it’s mostly a take-private by existing shareholders. Large investors, chief among them Ron Burkle and the Yucaipa Companies, will roll their stakes into the new enterprise, padded with a relative sliver of equity from Apollo Global Management, MCR Hotels and Hollywood star and tech investor Ashton Kutcher.
The second nifty element of this transaction is that the new Soho House is taking on $845mn of debt from Apollo and Goldman Sachs and partly using it to refinance a roughly $700mn loan. That suggests that the already highly leveraged group is adding an extra bit on top. Apollo is an expert in hybrid financing, which includes instruments that sit somewhere between equity and debt.
The upshot is that this deal brings together investors who are good at running hotels and investors who are good at running money, while keeping faithful insiders along for the ride. But make no mistake: faith is exactly what’s needed to turn this into a good deal for the buyers.
Say, for the sake of argument, that they would want a 10 per cent annual return on their investment. That would suggest they need to make $270mn of post-tax operating income. To hit that, Soho House — which lost money last year — would need to double both its revenue and its ebitda margin, Lex calculates. In other words: find more members, charge existing ones more, or spend less on showing them a good time. Probably all three.
Revenue has been growing: it was up 9 per cent in the first half of the year. Recently opened houses may become less of a drain as they mature, and as expansion into new cities slows, margins should improve. Still, Apollo and its companions face a significant challenge in securing Soho House access to a club that has previously proven out of reach: that of companies profitable enough to pay their way.
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