Grubhub's consistent market share loss has been one of the huge drivers of the abysmal stock performance of Just Eat Takeaway (OTC:JTKWY) . While Grubhub has reasonable underlying profitability in terms of EBITDA without feecaps. (The feecaps imposed in New York cost the company hundreds of millions in EBITDA); Grubhub's low market share is a bid sign for long-term cash flows. This is why Just Eat Takeaway has always set its eyes on turning around this asset by accelerating growth. Today an Amazon (AMZN) partnership was announced which can be a significant growth accelerator. An Amazon Partnership was always a very serious probability and in my view one of the only ways to properly turn Grubhub around.
So what does this Amazon partnership actually entail? Starting today Amazon Prime members in the US can sign up for a free year of Grubhub+ membership with unlimited free delivery. Interestingly Just Eat Takeaway management states that:
'The agreement is expected to expand membership to Grubhub+, while having a neutral impact on Grubhub's 2022 earnings and cash flow, and be earnings and cash flow accretive for Grubhub from 2023 onwards'.
Deliveroo had a similar deal with Amazon in the UK and European countries like France and Italy but there the deal had a significant negative impact on profitability. As delivery is profitable in the US there is no negative impact on earnings.
In addition, in exchange Amazon acquires a 2% stake in warrants of Grubhub and an additional 13% in warrants if certain performance conditions (new customers) are met. Every year the commercial deal renews, which means I think that Amazon's stake can grow over time until the deal is terminated. In a couple of years I think Amazon's stake could reach 20-40% depending how difficult the performance conditions are. I should say no other news media stated this but I believe this is what it is meant with renewal. It doesn't make sense to me that a contract is renewed every year with no benefit to Amazon.
As Amazon's stake grows over time it is also possible that JET will eventually dispose the entire stake to Amazon. Something I speculated was a possibility already back in September 2021. In addition Amazon again strengthens the customer proposition of Amazon Prime which is very valuable. For Grubhub this deal is an amazing way to reaccelerate growth with cheap customer acquisition. Amazon has 148 million Prime members in the United States; a huge customer pool to potentially attract.
Currently, Uber Eats (UBER) is twice the size of Grubhub. If the strategy works (which it will) and customers are retained Grubhub can close this gap significantly and become a serious competitor of Uber Eats. This puts pressure on Uber management to focus on retaining market positions instead of wasting capital growing suboptimal market positions in countries like Germany. So by weakening competition in the US JET can simultaneously benefit by growing or keeping share in countries like Germany and Canada. This is why this Amazon partnership is the start of a huge turnaround as the spillover effects also reach JET's other markets.
Just Eat Takeaway states in their press release:
'The Company, together with its advisors, continues to actively explore the partial or full sale of Grubhub. There can be no certainty that any agreement with any other parties regarding Grubhub will be reached or about the timing or terms of any such agreement. Any further announcements will be made as and when appropriate. '
JET is still actively seeking suitors for this asset. Obviously this partnership is a plus to any potentially disposal as Amazon is now a stakeholder of the company. However you put it Grubhub is an asset with a lot of potential for value creation. Interestingly, it was rumored that the founder of Grubhub, Matt Maloney, was also interested in buying Grubhub. We'll see what will happen with Grubhub, but in my view a full disposal of Grubhub may only occur in a couple of years when the bid prices reflect Grubhub's value better.
Time in time I write about Just Eat Takeaway's incredibly cheap valuation considering its valuable iFood stake, Northern Europe segment and Canadian business. By partnering with Amazon the stock is de-risked which positively impacts cost of capital, the partnership will lead to market share gains in the US and at last weakened competition which benefits other positions like Canada and Germany. It is also possible we will eventually see a similar deal in Canada and Australia with JET's Skip The Dishes and Menulog assets.
The stock is not done. The stock needs disposals preferably iFood, Menulog or other Just Eat markets like France to recapitilize the company and strengthen its strongholds. Selling the US is also a possibility but only at the right price. Focus and good execution is what Just Eat Takeaway needs, and this may just be the start.
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Disclosure: I/we have a beneficial long position in the shares of TKAYF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.