GREENWICH, Conn.--(BUSINESS WIRE)--Cat Rock Capital Management LP (together with its affiliates, “Cat Rock Capital”), a long-term oriented investment firm and beneficial owner of approximately 13.0 million shares of the common stock of Just Eat plc (“Just Eat” or the “Company”) (LSE:JE), representing circa 2% of Just Eat’s outstanding shares, today sent a letter to the Company’s Board of Directors (the “Board”). Cat Rock Capital urges the Board to address key issues that have caused Just Eat to become the worst-performing public equity in online food delivery globally. Just Eat’s shares have declined almost 30% in 2018 and now trade near the same absolute price as two years ago, despite approximately 100% revenue growth over the same period. Most recently, Just Eat was removed from the FTSE 100 index.
Alex Captain, Founder and Managing Partner, Cat Rock Capital Management LP, commented:
“Cat Rock Capital is a long-term supporter and shareholder of Just Eat, which we believe is a high-quality business with significant growth potential. However, shareholder frustration with management’s lack of accountability for delivering on this potential continues to damage Just Eat’s value and performance. As we have discussed with the Board, we believe the first step toward addressing this problem is clear: it must urgently lay out a three-year plan commensurate with Just Eat’s potential and link management’s remuneration directly to the achievement of that plan, aligning their interests with those of shareholders.
“To ensure management is focused on growing Just Eat’s core business, we also encourage the Board to consider strategic alternatives for non-core assets, which are a distraction and an inefficient use of shareholder capital. In particular, Just Eat’s minority stake in iFood, if sold at a fair price, could generate as much as £650 million, representing over 15% of Just Eat’s market capitalisation potentially available to return to shareholders.
“Just Eat’s shareholders have been very patient, but online food delivery is a rapidly evolving sector. Further delays in planning and decision-making will only continue to destroy shareholder value. For this reason, we strongly urge the Board to publicly announce its three-year financial targets and the associated executive remuneration package within the next 30 days. This is absolutely necessary for the management team to begin 2019 focused on execution and delivering value for all shareholders.”
The full text of Cat Rock's letter is included below and is also available at the following website: JustEatMustDeliver.com
A LETTER TO THE JUST EAT BOARD OF DIRECTORS
17 December 2018
Board of Directors
Just Eat plc
Fleet Place House
2 Fleet Place
London EC4M 7RF
Attn: Michael Evans, Chairman of the Board of Directors
Peter Plumb, Chief Executive Officer
Mike, Peter, and Other Members of the Board:
As you know from our prior conversations and correspondence, Cat Rock Capital is a long-term oriented investment firm based in the United States. We currently own approximately 13.0 million shares of Just Eat plc (“Just Eat” or the “Company”), representing circa 2% of the outstanding stock, and have been investors in Just Eat for close to two years. Over the past several years, we have researched and made significant investments in online food delivery businesses across many different markets.
We are long-term shareholders and believe that Just Eat is a high-quality business with significant growth potential. We support management’s strategy of building its own delivery capabilities, and we think that Just Eat has a structural competitive advantage over new entrants in the space because of the network effects of its clear market leadership position.
Despite the quality of Just Eat’s business and the magnitude of its growth opportunity, Just Eat’s stock trades at the lowest valuation among comparable online food delivery companies globally(1). Its shares have declined almost 30% in 2018 and now trade near the same absolute price as two years ago, despite approximately 100% revenue growth over the same period. Most recently, Just Eat was removed from the FTSE 100 index(2).
We believe the significant underperformance of Just Eat’s stock reflects shareholder frustration with management’s lack of accountability for delivering on the Company’s potential for profitable growth. This frustration has been compounded by the very concerning changes made to Just Eat’s remuneration plan for 2018, which now incentivizes revenue growth without accounting for profitability or capital efficiency. We believe that revenue growth targets are deeply flawed and may inadvertently incentivize significant value destruction in the context of the Company’s delivery investments.
We think the first step toward addressing Just Eat’s underperformance is clear: the Company’s Board needs to lay out a three-year plan commensurate with Just Eat’s potential, and management’s remuneration should be directly linked to the achievement of that plan.
For over a year, we have engaged constructively and in good faith with Just Eat management and the Board on the points in this letter, but to little avail. We are writing an open letter to the Board today to facilitate a transparent and urgent discussion about addressing the three key issues that we believe have caused Just Eat to become the worst-performing public equity in online food delivery globally.
We believe Just Eat’s lack of long-term, publicly disclosed targets for organic order growth and EBITDA per order has drastically depressed its valuation relative to peers and leaves management without a framework for making appropriate investment decisions during a critical time in the Company’s development. Consequently, it is imperative that Just Eat publicly commits to an achievable but appropriate three-year financial plan.
Given the trajectory of the business and the experience of global peers who have also invested in delivery, we believe the plan should include at least 20% organic order growth (vs. 27% in 1H18) and EBITDA per order at or above £0.79 (vs. £0.79 in 1H18) (3).
We are confident that organic order growth of 20% per year over the next three years is achievable and appropriate. The Company is already growing orders 27% organically, even before the expected benefits from its delivery investments(3). Moreover, Canada is growing orders much faster than the rest of the business (189% in 1H18) and now represents 12% of total orders in 1H18 vs. only 5% of total orders in 1H17(4).
We are equally convinced that Just Eat can generate EBITDA per order of £0.79 over the next three years. The business has a clear roadmap for understanding the costs and benefits of investing in delivery. Both GrubHub in the United States and Takeaway.com in the Netherlands have leveraged strong marketplace positions to enter the delivery market while maintaining or growing EBITDA per order(5). GrubHub and Takeaway.com were able to enter delivery without meaningfully sacrificing EBITDA per order because increases in marketplace EBITDA per order offset the dilution caused by their respective delivery investments.
Just Eat similarly benefits from a large, profitable, and growing marketplace business that will enable it to invest in delivery while maintaining its current levels of EBITDA per order. Moreover, Just Eat has already made investments over the past year that have reduced EBITDA per order from £0.98 in 2H17 to £0.79 in 1H18(6). We believe these investments should have a return in subsequent periods, which provides further room for investment while at least maintaining 1H18 EBITDA per order.
As long-term investors, we support investments that cement the long-term competitiveness of the business even if they temporarily depress profits. This is exactly why we support management’s strategy to move into the delivery market. The financial targets we have proposed give management significant latitude to invest in delivery and other initiatives while also creating accountability for delivering strong financial performance.
It is long past time for the Board to hold management accountable for achieving these financial goals – and begin to reverse the current erosion in shareholder value. Crucially, the Board must align management’s remuneration to the achievement of a comprehensive three-year financial plan.
Since Peter Plumb became CEO in September of 2017, the Company’s targets have been remarkably undemanding and have created little accountability for management to execute. Compounding this problem, the Board has set executive remuneration based on flawed metrics like revenue growth that give management bonuses for taking actions that may actually destroy shareholder value. These unambitious targets and flawed incentive schemes have significantly damaged the value of the business and shareholder returns. This clear misalignment with shareholders must stop.
Just Eat’s initial 2018 revenue guidance of £660mm – £700mm illustrates the Board and management’s tendency to set goals that are unjustifiably low and too easily achieved. The mid-point of this guidance essentially assumed zero revenue growth over the Company’s 4Q17 run-rate when including its earlier acquisition of Hungryhouse. Incredibly, this goal was set and communicated immediately after the Company delivered 30% organic revenue growth in 2017(7).
While management has avoided providing medium-term guidance for orders and EBITDA per order, it has been quite comfortable providing medium-term guidance that lowers its accountability. For example, management has been clear that shareholders should no longer expect the marketplace business to continue growing revenue faster than orders or to continue expanding margins(8). Egregiously, management provided no associated guidance on how much additional order growth shareholders should expect them to deliver for making these financial sacrifices. The financial targets we outlined above would provide much-needed accountability and reassure all shareholders that management is acting solely in their best interests.
3) Strategic Alternatives
While Just Eat’s core business is strong, there is much work needed to realize its growth potential. Just Eat owns significant non-core assets that are a distraction to management and that represent an inefficient allocation of shareholders’ capital. We urge the Board to initiate an orderly process to sell its interest in the iFood business in Brazil, and potentially Just Eat’s other non-European assets, at fair prices.
We say this not because we have any desire for short-term gains to the detriment of the business’s long-term growth, but because we think it would be a sensible step to increase management’s focus and allow Just Eat to return capital to shareholders. Several recent analyst reports estimate iFood’s value at an average of approximately £650mm(9), representing over 15% of the Company’s current market capitalization.
We believe that there would likely be strong interest in Just Eat’s non-core stake in iFood. Just Eat has no operating control of iFood with only 33% ownership, but Just Eat may be required to make additional capital contributions to maintain its ownership stake(10). To be clear, we do not support the sale of iFood if potential buyers cannot deliver a fair price.
Conclusion and Next Steps
Peter Plumb has now been Chief Executive Officer well over a year, and shareholders are still waiting for Just Eat to announce appropriate financial goals and for the Board to hold management accountable with a properly aligned remuneration package.
For this reason, we strongly urge the Board to publicly announce its three-year financial targets and the associated executive remuneration package within the next 30 days. This is absolutely necessary so that the management team can begin 2019 focused on execution and delivering value for all shareholders.
It is imperative that the Board hold management accountable. If management fails to commit to, and deliver on, the three-year financial plan and targets, we strongly believe the Board should begin to consider strategic alternatives for the business.
Online food delivery is a rapidly evolving sector. We are concerned that the slow pace of planning and decision-making at Just Eat will not only continue to destroy shareholder value but will also result in competitors eroding Just Eat’s leading market position. Shareholders will only further suffer (and competitors benefit) from a drawn-out planning process leading to a weighty presentation at the full year results in March. Moreover, the Company should provide shareholders with the specifics of its three-year financial plan more than 90 days in advance of the Annual General Meeting, which is scheduled to be held on 1st May 2019.
We remain excited about the prospects for Just Eat, which we firmly believe is a quality business with significant growth prospects. Realistic financial targets, appropriate incentives, and savvy strategic actions will allow Just Eat to realize its full potential. We welcome continued dialogue with the Board and other long-term shareholders(11).
Founder and Managing Partner
Cat Rock Capital Management LP
Sidley Austin LLP is serving as legal advisor to Cat Rock Capital.
About Cat Rock Capital Management LP
Cat Rock Capital Management LP is a long-term focused investment firm that manages capital on behalf of pension funds, endowments, foundations, and other institutional investors. It seeks to invest in a select number of high-quality companies, with a long-term approach that emphasizes deep fundamental research. Cat Rock Capital is based in Connecticut, USA and was founded in 2015 by Alex Captain, a former Partner at Tiger Global Management.
(1) Comparable online food delivery companies include Takeaway.com, Delivery Hero, and GrubHub. Just Eat has a lower valuation than all three comparable businesses based on both 2019 estimated revenue and earnings per share multiples. Valuation multiples based on stock prices and consensus 2019 estimates for revenue and earnings per share are as of 14th December 2018.
(3) 1H18 organic order growth reported in Just Eat 2018 interim results dated 31st July 2018. 1H18 EBITDA per order calculated from figures for EBITDA and orders reported in Just Eat 2018 interim results dated 31st July 2018.
(4) 1H17 Canada orders and order growth reported in Just Eat 2017 interim results dated 26th July 2017.
(5) GrubHub grew EBITDA per order from $1.18 in 2014 before launching delivery to $1.69 in 1H18 when delivery had become more than 20% of total orders. Takeaway.com experienced a minor decline in EBITDA per order (€1.66 in FY16 vs. €1.61 in 1H18), but the allocated public-company costs associated with the Company’s IPO contributed to the decline – adjusted for these costs, Takeaway.com delivered roughly flat EBITDA per order despite not charging any delivery fees to consumers.
(6) EBITDA per order for 2H17 and 1H18 calculated from EBITDA and orders reported in Just Eat 2017 interim results dated 26th July 2017, 2017 full year results dated 6th March 2018, and 2018 interim results dated 31st July 2018.
(7) Organic revenue growth reported in Just Eat 2017 full year results dated 6th March 2018. Just Eat 4Q17 revenue calculated from 3Q17 year-to-date revenue reported in 3Q17 Update dated 31st October 2017 and 2017 full year results dated 6th March 2018.
(8) At the Company’s 2018 Capital Markets Day, management said that it expects the “convergence of order and revenue growth” in the marketplace business, which compares to historical performance where revenue growth exceeded order growth. Moreover, management told shareholders that “over the next few years, you should expect to see marketing costs and tech costs particularly rise” in the marketplace, which should cause the business to plateau at “current margins”. Marketplace revenue growth that is in-line with order growth and flat marketplace margins run contrary to what we have witnessed at every other online food delivery marketplace business globally.
(9) J.P. Morgan report dated 11th November 2018 (£600mm iFood value); Goldman Sachs report dated 24th October 2018 (£813mm); UBS report dated 4th October 2018 (£470mm); Bank of America report dated 6th August 2018 (£766mm).
(11) The views described herein are based on publicly available information with respect to the Company. Certain financial information and data used herein have been derived or obtained from, without independent verification, publicly available information including public filings with regulatory authorities and from other third-party reports, by the Company or other companies deemed relevant. Cat Rock Capital has neither sought nor obtained consent from any third party for the use of previously published information. Any such statements or information should not be viewed as indicating the support of such third party for the views expressed herein. Cat Rock shall not be responsible or have any liability for any misinformation contained in any third-party report or regulatory filing.
Cat Rock Capital is publishing this announcement solely for the information of other shareholders in Just Eat plc. This announcement is provided merely for general informational purposes and is not intended to be, nor should it be construed as (1) investment, financial, tax or legal advice, or (2) a recommendation to buy, sell or hold any security or other investment, or to pursue any investment style or strategy. Neither the information nor any opinion contained in this announcement constitutes an offer to purchase or sell or a solicitation of an offer to purchase or sell any securities or other investments in the Company or any other company by Cat Rock Capital or any fund or other entity managed directly or indirectly by Cat Rock Capital in any jurisdiction. This announcement does not consider the investment objective, financial situation, suitability or the particular need or circumstances of any specific individual who may access or review this announcement, and may not be taken as advice on the merits of any investment decision. Any person who is in any doubt about the matters to which this announcement relates should consult an authorised financial adviser or other person authorised under the Financial Services and Markets Act 2000.
FORWARD LOOKING STATEMENTS
This press release and the letter contain certain forward-looking statements and information that are based on Cat Rock Capital’s beliefs as well as assumptions made by, and information currently available to, Cat Rock Capital. These statements include, but are not limited to, statements about strategies, plans, objectives, expectations, intentions, expenditures and assumptions and other statements that are not historical facts. When used herein, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and “project” and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumption as to future events that may not prove to be accurate. Actual results, performance or achievements may vary materially and adversely from those described herein. There is no assurance or guarantee with respect to the prices at which any securities of the Company will trade, and such securities may not trade at prices that may be implied herein. Any estimates, projections or potential impact of the opportunities identified by Cat Rock Capital herein are based on assumptions that Cat Rock Capital believes to be reasonable as of the date hereof, but there can be no assurance or guarantee that actual results or performance will not differ, and such differences may be material and adverse. No representation or warranty, express or implied, is given by Cat Rock Capital or any of its officers, employees or agents as to the achievement or reasonableness of, and no reliance should be placed on, any projections, estimates, forecasts, targets, prospects or returns contained herein. Any historic financial information, projections, estimates, forecasts, targets, prospects or returns contained herein are not necessarily a reliable indicator of future performance. Nothing in these materials should be relied upon as a promise or representation as to the future