In Prosus's view the 25 per cent. share of own-delivery orders that the Just Eat Board quotes masks Just Eat's lack of traction with its own-delivery rollout as it represents a blend of Canada (acquired by Just Eat in December 2016) with 100 per cent. own-delivery and other geographies where own-delivery represented only 7.8 per cent. of orders in H1 2019. Notably, within Just Eat's portfolio, Canada (100 per cent. own-delivery), and Brazil (>20 per cent. own-delivery) exhibit vastly superior growth compared to other assets such as UK, Spain and Italy where Just Eat is losing market share at an accelerating pace to own-delivery competitors with a superior customer proposition.
Just Eat's track record in Australia and New Zealand starkly demonstrates how underinvestment can erode value. Just Eat acquired Menulog in May 2015 for GBP421 million. Prosus believes Menulog was slow to react to the intensifying competitive pressure after Deliveroo and Uber Eats entered the market, investing less than GBP10 million in 2018 to enhance its proposition. As a result, Menulog lost market leadership and market share and suffered declining revenue. In 2017 Just Eat incurred a GBP180 million impairment relating to Menulog, and current broker consensus for Menulog's SOTP value is GBP104 million, 75 per cent. below the acquisition price.
This is in contrast to Brazil, where, with Prosus's operating support and investment (in 2018, Prosus announced an additional investment commitment of US$400 million in iFood) in partnership with Just Eat, iFood has been able to swiftly react to competitive pressures, rapidly building out its own-delivery capabilities and accelerating its growth.
As consistently stated by Prosus, and now acknowledged by Just Eat's Board, Just Eat requires increased investment, which Prosus intends to make in own-delivery, marketing, product and technology. This investment need is taken into account in the value of the Increased Offer.
2.3 Prosus's Increased Offer provides certainty whilst the Takeaway.com Offer carries significant risks for Just Eat Shareholders
The Takeaway.com Offer carries significant risk for Just Eat Shareholders with Takeaway.com's current share price of EUR86.50 marginally below its all-time high. Takeaway.com is trading at 9.9x 2020E enterprise value/revenue, two to three times the level of peers. This is in the context of Takeaway.com's Q3 2019 order growth slowing to 15 per cent. for the Netherlands and 21 per cent. for Germany (by comparison, Prosus's food assets are growing at 320 per cent. for Swiggy, 122 per cent. for iFood and 92 per cent. for Delivery Hero). At these valuation levels, Prosus believes that there is little room for execution missteps, further growth slowdown or increased competition.
Immediately prior to acquiring Delivery Hero's German assets in 2018, Takeaway.com's share price was EUR44.90. Prosus believes that one of the key drivers of Takeaway.com's strong share price performance since the transaction has been an increase in the share of orders from Low Competition Markets, which has increased from 37 per cent. in the nine months to September 2018 to 65 per cent. in H1 2019. Combining with Just Eat would reduce Takeaway.com's share of orders in Low Competition Markets to 28 per cent., which is materially below pre-Germany deal levels. Prosus believes that this indicates that there is a very meaningful downside risk to the valuation of the combined entity.
The limited synergies that Takeaway.com and Just Eat have announced represent just 1.6 per cent. of the combined cost base. These limited synergies do not, in Prosus's view, compensate for the risks outlined above. These synergies also primarily come from "operational and technology efficiency", which Prosus believes relies on the 3 per cent. headcount reductions referenced by Takeaway.com. This is in contrast to Prosus's focus on investment.
2.4 Takeaway.com's playbook developed in Germany and the Netherlands would not address Just Eat's challenges
Prosus believes that Takeaway.com takes a narrow view of the food delivery sector based principally on its experience in the Netherlands and Germany. These markets have so far been relatively insulated from innovative and well-funded global own-delivery competitors meaning Takeaway.com has limited experience of competing against own-delivery players operating at scale.
In contrast, in the UK both Uber Eats and Deliveroo have been operating at scale for years with large and growing market share and consumers have come to expect the superior selection and service quality these platforms deliver. As just one example, 20 of the Tripadvisor top 50 ranked restaurants in London are listed on Deliveroo or Uber Eats, compared to six of 50 listed on Just Eat. Prosus believes this illustrates the ability of innovative own-delivery platforms to unlock superior selection for customers, leading to increasing variety / frequency of delivery occasions and ultimately superior growth compared to underinvesting marketplace incumbents.
Prosus believes that the severe market share loss suffered by Menulog in Australia at the hands of the same two own-delivery competitors provides a cautionary tale for Just Eat in the UK and other markets. If the consumer demand for superior selection and service quality provided through the own-delivery model is not addressed, then Just Eat Shareholders may well face the same reality of meaningful market share loss and value erosion, but on a much larger scale.
Prosus does not believe Takeaway.com is well-positioned to help Just Eat address this challenge. In both Berlin and Amsterdam, Takeaway.com offers only four of the Tripadvisor top 50 restaurants on its platforms. While this marketplace-driven approach has so far worked in Takeaway.com's markets given the absence or lack of focus of global own-delivery competitors, Prosus believes the UK situation is different and Takeaway.com's playbook will not help address the significantly higher customer expectations in Just Eat's markets.
2.5 Takeaway.com is not the right partner to help Just Eat transition to an own-delivery focused hybrid model
The Just Eat Board is now acknowledging that building a hybrid own-delivery / marketplace model is required for long-term success. Takeaway.com has very limited own-delivery experience and no meaningful track record, with an own-delivery order share of just 4.9 per cent. Takeaway.com's management has repeatedly stated that it believes own-delivery to be an inferior business model that cannot be profitable, which in Prosus's view is not true and reflects Takeaway.com's lack of own-delivery experience and narrow view of the food delivery industry restricted to the European markets Takeaway.com operates in. Prosus is confident that the own-delivery model is profitable at scale, as shown by the performance of Swiggy, Just Eat Canada, Meituan Dianping and Wolt, which profitably operates an own-delivery model in a number of European markets.
Furthermore, Just Eat and Takeaway.com appear not to be aligned on own-delivery strategy. Just Eat plans to leverage their "world-class Skip technology and operational know-how to build own-delivery capabilities" while Takeaway.com intends to roll-out its "Scoober restaurant delivery services in the UK". Just Eat and Takeaway.com also appear to disagree on the expected impact of such growth investments on profitability. Just Eat acknowledges the potentially negative impact on profitability, whilst Takeaway.com claims that the roll out of own delivery (Scoober) will have "no material negative impact on the bottom line".
These contradictions demonstrate the reactive nature of Just Eat and Takeaway.com's response to the changing dynamics in the sector raised by Prosus and represent a lack of strategic alignment and consistency, highlighting the operational execution risk attached to Takeaway.com's offer. In contrast, Prosus has been consistent throughout in its stated strategy for Just Eat.
Prosus believes that its initial Offer to Just Eat Shareholders provided fair and certain value. The Increased Offer provides even more compelling and certain value for Just Eat's Shareholders at a further premium to Takeaway.com's all-share offer, which comes with significant risk.
Just Eat Shareholders are urged to accept the Increased Offer as soon as possible and, in any event, by no later than 1.00 p.m. (London time) 27 December 2019.
3. Financing of the Increased Offer
The cash consideration payable by MIH pursuant to the Increased Offer will be financed by a bridge loan agreement with J.P. Morgan Chase Bank, N.A., London Branch, BNP Paribas Fortis SA/NV, Citibank, N.A., London Branch, Citibank, N.A., Jersey Branch, Deutsche Bank Luxembourg S.A., Morgan Stanley Senior Funding, Inc. and Intesa Sanpaolo S.p.a., Filiale Frankfurt am Main as original lenders (the Original Lenders), providing for a term loan bridge facility. The proceeds of the bridge facility will be used to fund the cash consideration payable by MIH to Just Eat Shareholders in connection with the Increased Offer. Prosus has secured the fully committed bridge financing from the Original Lenders.
J.P. Morgan Cazenove, as financial adviser to Prosus and MIH, is satisfied that the resources available to MIH are sufficient to enable it to satisfy in full the cash consideration payable to Just Eat Shareholders under the terms of the Increased Offer.
4. How to accept the Increased Offer
A revised offer document (the Revised Offer Document) containing the full terms of, and conditions to, the Increased Offer together with the associated revised form of acceptance (the Revised Form of Acceptance) will be posted to Just Eat Shareholders and be made available, subject to certain restrictions relating to persons resident in Restricted Jurisdictions, on Prosus's website at www.prosus.com/investors/justeat, in due course.
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