Activist investors targeted both Macy’s and Just Eat Takeaway N.V. this October. The investor proposals strongly suggested each company should execute a spinoff: in the case of Macy’s, its e-commerce unit; for Just Eat Takeaway, its newly acquired U.S. operation, Grubhub.
The reasons were different, though. Macy’s online business is significantly outperforming its brick-and-mortar stores and could fetch an attractive valuation as a separate company. At Just Eat Takeaway, the opposite is true: potential carve-out Grubhub is underperforming its parent.
Spinoffs and divestments require careful strategic consideration and meticulous planning, and even then, they are often not successful.
A 2019 study by Willis Towers Watson and City University of London’s Cass Business School documented that more than half of sales or spinoffs of subsidiaries or business units from 2010 through 2018 resulted in below-market share-price performance for the seller.
“Especially in today’s favorable environment, we see an increasing number of assets coming to market that had been heavily integrated with their former parent company.”
— Georg Keienburg, BCG managing director and partner
In addition, carving out a business unit as a precursor to a divestiture can be complex and costly, according to an October 20 report by Boston Consulting Group. The report found that more than 50% of carve-outs larger than $300 million require longer-term support in the form of transitional service agreements with the former parent. Costs range from approximately 1% to 5% of the divested business’s revenues but reach as much as 13%.
“Especially in today’s favorable environment, we see an increasing number of assets coming to market that had been heavily integrated with their former parent company,” said Georg Keienburg, a BCG managing director and partner. “This type of carve-out requires significant pre-work, including clear guidance on separation budgets, the future target operating model, and a value creation roadmap, to make them successful.”
Are Macy’s and Grubhub on a path to execute these spinoffs? In. both situations, numerous challenges would have to be overcome. We outline the investors’ demands and managements’ reactions below.
The Pitches
Starting in early October, JANA Partners announced it was pushing for Macy’s to spin-off its e-commerce operation, as the unit is outperforming the department store’s in-person sales. Macy’s brick-and-mortar sales were on pace to fall 16% this year (versus 2019), compared with an expected 7% to 9% growth in e-commerce sales this year and nearly 24% growth during 2020. In August, Macy’s said e-commerce sales this year were projected to be between $8.35 billion and $8.45 billion. Digital accounted for 44% of net sales in the 12 months ending January 30, 2021.
Macy’s total current market value is around $6.9 billion; in an October 13 letter to Macy’s board, JANA Partners said the e-commerce business could be worth as much as $14 billion on a standalone basis. In addition, JANA says Macy’s could increase its stock price by 100% if it executed a spinoff similar to Saks’ spin of Saks.com.
In its letter to the Just Eat Takeaway board, Cat Rock called for the Amsterdam-based company to sell or spin-off 40% to 100% of recently acquired Grubhub by December 31 “to refocus JET’s business and address the deep and damaging undervaluation of the company’s equity.” It added that JET had been distracted by the $7.3 billion Grubhub deal, completed four months ago, and the acquisition had reduced the group’s financial flexibility. According to Cat Rock, since announcing the Grubhub purchase just 16 months ago, JET’s stock has underperformed the MSCI World Index by 69%, implying a negative valuation for Grubhub.
However, Cat Rock does think Grubhub has a future in the hands of another company, given its 300,000 restaurant partners and same-day delivery logistics network. Cat Rock founder Alex Captain’s letter to the JET board said a sale to Amazon, Walmart, or Instacart would make sense to allow Grubhub to compete against “the converged online food and online grocery offerings of DoorDash and UberEats. There is no question that a combined online food delivery and grocery app offers a far better consumer proposition than either service alone.” Cat Rock gave JET a deadline because, it said, “an extended period of strategic uncertainty or an unnecessary integration will hurt both JET and Grubhub.”
The Activist Investors
Cat Rock Capital is a Greenwich, Conn.-based hedge fund. It owns 13.8 million shares of Just Eat Takeaway (JET), or about 6% of its outstanding shares. Managing partner Captain was a big fan of the merger of Takeaway.com and Just Eat Takeaway in 2019. But Cat Rock released a presentation in July criticizing the company’s management. JET’s shares had dropped 23% from October 2020 to July 1. The letter said Cat Rock was “deeply disappointed by the company’s poor handling of its relationship with investors.” It said JET had not been transparent in communicating the costs of its investments and the corresponding short-term impact on EBITDA; had publicly criticized the potential of businesses it was actively investing in, such as logistics and grocery delivery, “causing immense confusion and misunderstanding;” and had failed to “address competitor attacks and correct misinformation on its operational acumen.”
JANA Partners, the investor targeting Macy’s, focuses on “event-driven” value investing. Previous targets include Walgreen, retailer Tiffany, Bristol-Myers Squibb, Outback Steakhouse, and Whole Foods Markets. In addition, JANA tends to win board seats. Jana Partners portfolio manager Scott Ostfeld first brought up the idea of an e-commerce spinoff on October 7 at the 13D Monitor Active-Passive Investor Summit, according to Reuters. The amount of JANA’s stake in Macy’s was not disclosed when it announced the investment on October 14.
What Do Analysts Think
According to MarketWatch, Cowen analysts say Macy’s e-commerce unit could come with an $11.5 enterprise value and be worth as much as $40 per share, compared with Macy’s total current market capitalization of $8.3 billion. “We believe a spinoff could be possible, and management and the board have and are analyzing this possibility along with other value-generating initiatives,” said Cowen analysts. “However, we acknowledge that there have not been many successful long-term proof points, and there are significant risks to destabilizing the business and slowing momentum.” Citigroup analyst Paul Lejuez wrote that “the complication and cost to separate would be extremely high. … The push to split off e-commerce may create noise near term, but we don’t think it makes sense to assume it will happen.”
Analysts did not react quickly to Cat Rock’s recent demands. But after Just Eat Takeaway’s October 21 investor day, analysts at Jefferies pointed out that Grubhub founder Matt Maloney was already departing JET. “The balance of probability suggests that the U.S. is now non-core and will be put into strategic review,” according to Dow Jones. That could mean Grubhub will exit all non-Tier 1 markets. However, the U.S. operation is likely to deliver good third-quarter growth, said Jefferies.
Managements’ Reactions So Far
Just Eat Takeaway.com rebuffed Cat Rock Capital’s proposal to spin off or sell Grubhub, saying on Monday the company had a “clear improvement plan to refocus” the U.S. business. “While Grubhub has some specific challenges today, it is a large and growing business with good underlying profitability,” the company said. Earlier this month, Just Eat Takeaway’s CEO, Jitse Groen, noted that he was not open to selling the business. Grubhub lost market share during the pandemic, which it attributed to the closure of U.S. business offices in major cities. But on the company’s investor day, President Adam J. DeWitt said Grubhub would be “rolling out new verticals [including convenience stores] and exploring other ways to drive growth” and launching programs to increase diner presentation and loyalty. He also said that he expected Grubhub to take part in the consolidation of the U.S. delivery market.
Macy’s has not released a detailed statement about the JANA Partners’ proposal. However, on the retailer’s August 19 second-quarter earnings call, Macy’s CEO Jeff Gennette said the retailer plans to invest in digital shopping, data and analytics, technology infrastructure, and fulfillment capabilities. “To me, it is clear that a comprehensive retail ecosystem with physical stores in the best malls and the most productive off-mall locations integrated with the best-in-class e-commerce offering is a powerful combination and is moving us forward as a strong digitally-led omnichannel business,” said Gennette.
Stock Performance
JET traded at less than 8x 2022 normalized EBITDA based on management’s long-term margin guidance, according to Cat Rock. But by Tuesday at 1 p.m., a day after JET’s rebuttal to the Cat Rock letter, the share price had hit $81.35%, up 7%. The stock’s 52-week high is $124.15. JET’s American depositary receipts were down 1.7% on Monday, to $15.47. The ADRs’ 52-week high is $36 per share. JET has a market cap of $16.2 billion.
Macy’s shares have more than doubled since the beginning of 2021. As of Monday’s close, the stock is up 17%, to $26.83, since the JANA Partners proposal on October 13.
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