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Huel's IPO

By Yair Trachtenberg, Ismael Fathy Martínez (Esade), Billy Dinsdale, Oscar Fontaine and Bilal Rashid (LSE)

Photo: Joseph Greve (Unsplash)

 

Summary of IPO


Huel is a global plant-based meal replacement maker, based in Hertfordshire. The group is known for producing "complete food" powders, drinks, snacks, and dry meals made from plant ingredients like oats, coconut, and flax seeds, all of which claim to contain "26 vital vitamins and minerals."


After an increase in popularity for its products as a result of the pandemic fitness boom, Huel hired Goldman Sachs and JPMorgan to advise on a possible IPO in the London Stock Exchange. Huel is seen as one of the most promising start-ups in the UK, with a strong social media presence designed to appeal to younger, fitness-conscious customers.


The announcement comes after the group recently expanded into the United States, Europe, and Japan.


The last time the company raised money was back in 2018, bringing its valuation at the time to £220m, and the IPO that Huel is currently considering could value the company at up to £1bn.


Company and IPO Profile:


  • Sector(s): Food and Beverage, Nutrition

  • Exchange floated: London Stock Exchange


  • Valuation and relevant multiples at IPO:

- Market Capitalization:

- EV: £1bn

- EV/Revenue:

- EV/EBITDA:

  • Coordinators/Advisors: Goldman Sachs, J.P. Morgan


Strategic Rationale


The past decade has seen a massive change in the meal replacement, personal health, and fitness industries, with the exponential uptake of veganism, vegetarianism, and general healthy eating among millennials and generation Z, today’s consumers are significantly more aware of what they put into their bodies. This really came to a head during the height of the coronavirus pandemic, with lockdowns removing access to gyms and individuals having more control over personal nutrition while away from the office. Hertfordshire based Huel has been one of the key winners of this growth in the nutrition and meal replacement sector, moving from strength to strength in recent years, with the immensely successful 2020 introduction of its new ‘Black Edition’ MRP and instore distribution with major domestic partners such as J Sainsbury PLC, Boots & WH Smith, as well as internationally, with Swedish supermarket brand ICA. Off the back of these new partnerships, Huel has seen revenue almost double from £40mn in 2018, to £72 in 2020, with sales rising by 52.5%, assisted by expansion into new international markets, with 56% of sales coming from outside the UK.


According to data provider Mordor Intelligence, the meal replacements market size is expected to grow at a CAGR of 7.64%, with the current single largest market being the USA, but the fastest-growing being the Asia-Pacific region. Therefore, this decision to float on the LSE may prove opportunistic, looking to capitalise on the strength of the market now and ride the wave of fresh capital into further expansion, such as it did in it’s Q3 2019 Series A, raising the intended amount of £20m. With its IPO, Huel is hoping to improve the somewhat bumpy track record of the past few major IPOs in London, with disappointing results stemming from the recent listings of The Hut Group (LON: THG) and Deliveroo (LON: ROO) who have seen 80% and 48% losses in their market capitalisation, relative to their IPO valuation, respectively.


Media/Public Reaction


Following reviews last year of Britain’s listing rules, expectations are high for the London Stock Exchange, whose share of global equity values has fallen from 8.5 percent to 3.6 percent in 15 years. After this slowing of new IPOs on the UK stock market and difficulties to entice more start-ups to go public at home rather than list overseas, a potential London listing for the Hertfordshire-based Huel would come at the right time.


Despite growing popularity since the pandemic, investors are worried about the low profit-making company’s potential for growth in this niche market. With an increasingly overcrowded meal replacement market, many argue that Huel could face the same fate as Deliveroo’s failed IPO on the London Stock Exchange. This bearish sentiment is exacerbated by Huel’s recent 15% price increase on their products in response to inflation, as opposed to competitors who offer similar products for a fraction of the price.


In such a highly competitive sector, consolidation through acquisition by Nestle, Unilever, or direct competitors seems another popular alternative to fund future growth. Investment banks are giving advice on a potential sale of the business in a dual-track process. The group’s founder Julian Hearn, who previously established and sold the affiliate marketing company Mash Up Media, could then remain at the helm of Huel’s marketing division.


Potential Risks and Downsides


Huel is currently being advised on a dual-track process, though an IPO is seen as the preferred option to fund their future growth. This comes at an interesting time, with fears of inflation and interest rate hikes threatening to slow the longstanding bull run we have been seeing in public markets during the Covid-19 pandemic. Markets have currently been going through a period of correction and the lengthy nature of IPOs and potential for delays pose a risk to Huel, as the amount of capital they will be able to raise through an IPO may be hampered by such exogenous factors, hence making the timing of the IPO critical to its success.


Another potential obstacle that comes with going public is the requirement to meet certain standards of disclosure, governance, and regulation, which will add to the recurring costs of Huel. This comes alongside the one-off underwriting, legal, accounting, and exchange fees associated with listing; however, it is worth noting that listing in London is generally cheaper than listing in the USA. Huel may be able to further reduce the costs associated with going public by listing on the AIM, though this seems unlikely as the firm is arguably too large, given its £1 billion valuation.


Reflecting upon their valuation, however, Huel has been producing operating losses for the past few years and investors may be less forgiving of optimistic valuations in a higher interest rate environment. Moreover, Huel will face increasing competition in the coming years as start-ups including LA-based Soylent seek to enter the UK market, posing additional challenges for the start-up.



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