Healthy Mummy cashes out in the most intriguing deal of the COVID era
by Adir Shiffman,
February 20, 2022 07:26 PM
Last week the relatively small acquisition of niche online fitness business The Healthy Mummy by low-profile public company Halo Food Co was easy to miss, but the $17 million buyout has so many peculiarities that it is surely a candidate for most intriguing tech deal of the COVID-19 era.Halo, until recently known (or equally unknown) as Keytone Dairy, is a food business with growing revenue but no real profit. Worth just $25 million, it has a remarkably well-credentialed chairman in Peter James, who also chairs tech star Nearmap.James is no stranger to good acquisitions and Halo’s purchase of The Healthy Mummy (THM) for four times forward EBITDA looks like a bargain, particularly given its 20 per cent profit margin.Wales-born Rhian Allen conceived the idea for The Healthy Mummy in 2010, while pregnant with her first son and relaxing on NSW’s South Coast. Then in her early-30s, she quit her executive role at Australian Consolidated Press and sold the family home to fund THM.The company now generates $20 million a year, typically from mothers with younger children. Subscriptions account for 40 per cent of sales, with digital content such as recipes and fitness programs delivered via its website and mobile app.The other 60 per cent comes from branded nutrition products and fitness merchandise sold via direct-to-consumer e-commerce and at Priceline.In 2017 this enticing market and blended revenue mix attracted Richard Whiteoak’s eponymous private equity firm to buy a 50 per cent stake at a reported valuation of $10 million to $20 million. He had raised funds from wealthy individuals including Whiteoak advisor and Zip chairman Diane Smith-Gander.As late as 2019, Rhian Allen’s business was neither growing nor profitable ... Now she’s banking $5m plus another $3.2m in shares.Now Halo has come knocking, keen on the business, but also on the chance to use its own manufacturing to produce THM’s nutritional products. These synergy savings are forecast to reach $800,000 a year.In excitedly describing the deal, Halo called THM a “fast growing, profitable, and cash generative business”. The latter two points require some faith because neither net profit nor cash flow was provided.But it is the claim of “fast growing” that is most difficult to reconcile.The start-up certainly grew after Whiteoak became involved, when Allen predicted a doubling of sales to $20 million. That target was hit within two years, although it didn’t translate into profit and FY19 was only break-even.But that was largely the end of its growth, and the change in THM’s trajectory during the pandemic was very much atypical. Despite lockdowns, FY20 revenue was flat. But margins rose 10-fold and EBITDA reached $1 million.An exercise in guessworkMore astonishingly, revenue also failed to grow materially in FY21. But margins further rocketed to reach an impressive 20 per cent. The result was normalised EBITDA of $4.1 million, a multimillion-dollar “profit” figure prominent across Halo’s announcements.Yet there is no explanation for why two booming pandemic years delivered a paltry 5 per cent rise in online revenue. Nor for how EBITDA margins nevertheless improved by a mind-blowing 20,000 per cent.These questions make valuing The Healthy Mummy an exercise in guesswork. It is no easier assessing the plausibility of THM’s FY22 forecasts, which feature a 21 per cent rise in revenue and further margin expansion.Exactly how a business that missed the lockdown boom will suddenly start growing again remains a mystery.These peculiarities might partly explain why Halo’s share price fell after the deal’s announcement. It also didn’t help that major shareholder Bergen exited their entire stake into this deal.Revenue growth plus profitabilityYet, investors might be missing something that’s unique to public markets. Halo has delivered strong revenue growth but losses, while The Healthy Mummy struggled to grow but delivered rising earnings.As a combined entity, Halo can now boast both revenue growth and profitability. This change could herald a major market re-rating of the company, provided THM hits those FY22 forecasts.As for Whiteoak, it likely has mixed emotions. At its reported entry valuation, the $8.5 million payday probably only represents a modest return. Plus, it has agreed to take $3 million in Halo shares.For Founder Rhian Allen, though, it’s a great deal. As late as 2019, her business was neither growing nor profitable. Then some mysterious margin improvement took hold, and now she’s banking $5 million plus another $3.2 million in shares. Then there’s $5 million more if THM meets its FY22 and FY23 targets.Allen has said that the deal took 18 months from first contact to closing, and the implications of this delay are incredible. Since August 2019, Halo’s share price has fallen 75 per cent. Thus, Allen’s share-based payment is now worth 10 per cent of the company, and this long courtship is arguably the reason she will become the company’s largest shareholder.With so much equity exposure, it is unsurprising that Allen is continuing as CEO. As she is privy to THM’s first half performance, missing full-year forecasts will be greeted with cynicism by shareholders.On the other hand, if Allen really can generate revenue and earnings growth in FY22, then millions more dollars will be added to her well-earned payday. It will also supercharge Whiteoak’s returns, while former shareholder Bergen will be ruing its decision to fully exit just as the business was turning the corner.
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