Just Eat Activist's Letter to Santa Is Wishful Thinking

(Bloomberg Opinion) -- As with so many of the letters received by Father Christmas around this time of year, the epistle sent by an activist investor to the management of Just Eat Plc on Monday seems like rather wishful thinking.

The demands made by Cat Rock Capital Management LP, which says it owns about 2 percent of the British food delivery website, include asking management to set more ambitious targets and holding officials accountable by tying pay packets more clearly to the end results. It's quite hard to disagree with the sentiment, but the activist is short on solutions.

The most substantive measure suggested is the sale of Just Eat's investment in Brazilian peer iFood. Cat Rock reckons the 33 percent stake could be worth some 650 million pounds ($821.2 million), equivalent to 17 percent of Just Eat's total market capitalization at the close of trading on Friday. The activist argues the money raised should be returned to shareholders.

It seems a rash gamble, given that growth at iFood seems to be exceeding that at Just Eat. In July, the company said iFood’s revenue almost doubled in the 12 months through March, while Just Eat’s sales grew 49 percent. The British firm is considering a further investment in the unit, which makes some sense.

Just Eat's minority stake means that iFood's earnings aren't consolidated onto its income statement. But it still contributes to the way investors value the firm, and being able to highlight the exposure to the fast-growing Brazilian market is compelling. Sacrificing potential future gains to reward shareholders now would be shortsighted, and should only be considered if management fail to improve their execution of the strategic growth plan.

Here, Cat Rock has a valid point. The rocky implementation of the company’s new strategy justifies a keener focus on management. Just Eat's success to date has been built on its marketplace business model, which makes the restaurants responsible for the deliveries. That's kept its costs down. It's now trying to build a new pillar of growth by offering its own delivery network, which will enable it to serve more restaurants. 

That will inevitably dilute profitability, and the share price has reacted accordingly over the past year, with Just Eat significantly underperforming its peers. The parent company’s forecasts imply a 21 percent Ebitda margin this year. Its marketplace, which generates as much as 75 percent of revenue, had an Ebitda margin of 39 percent in 2017.

Its natural to see some impact as the company spends now to improve profit later. But the scale of that dilution has been a shock to investors, who have every reason to be concerned about management's execution as a consequence. It’s therefore positive for an activist to draw attention to it.

But as naughty as Just Eat might have been, it’s a lot to expect a nice Christmas present in the form of a divestment of one of its fastest-growing assets.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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