Letters

Expectations for 2019 – December 2018

Expectations for 2019

The strong market correction of the last months of 2018 was punishing to our reported return in the year. But it didn’t distract us from our mission: to find and buy consumer businesses offering significant upgrades to consumer value propositions at attractive prices and short their competitors with inferior consumer offers that are overpriced and losing market share. On that count, the volatility offered us the opportunity to add to our portfolio at very attractive prices.

Meanwhile, our companies have continued to create value for their consumers and for you. Month after month, our long investments continue to improve their customer offer, take market share and increase their Free Cash Flow. Our businesses are thriving, and time is one our side. The volatility in the market and in our reported returns may give conflicting messages throughout the year, but make no mistake, your businesses are creating value. In the next section, you can see an example of this from our Takeaway.com investments.

An investment in Somar allows you to add to your portfolio attractively priced emerging consumer innovators in the US and Europe. To believe in the success of your investment you must believe that:

  • Companies that have a superior consumer value proposition will continue to take market share and thrive financially.
  • Management alignment with shareholders, in the form of direct stock ownership, ensures that part of the consumer value created flows through to shareholders.
  • Somar’s alignment with you ensures full focus on finding and investing in the most attractive opportunities at the most compelling prices. As the largest LP in Somar, I am fully aligned with you.

This is a time-tested recipe for business and financial success. That doesn’t mean it is easy. Businesses, the macro environment, and the financial markets all have ups and downs. This requires a successful fundamental investor to stay focused on the long-term mission and daily execution. Our team is relentlessly focused on it, on your behalf.

 

Takeaway.com Update

In December, Takeaway.com (“Takeaway”) announced the agreement to acquire the German business of its main competitor in the country, Delivery Hero. If approved, this deal would combine the top 2 players in the market and create the undisputed leader. This news strengthens our investment thesis, increases our expected upside from the investment and reinforces the alignment of interests of management.

In our August 2018 letter we argued that the network economies in the food delivery, make it a winner-take-most business. In our table 1 of the same letter, we showed how the industry recognized this and tended to be consolidated, market by market, by the emerging leader. Rather than embarking in value-destructive price and marketing investment wars, the non-leading players prefer to sell their business to the leader. This deal is further confirmation of this trend.

The deal is highly accretive and will likely lead to more financial upside for Takeaway investors than we anticipated when we made our original investment:

  • Takeaway will almost double its revenues in Germany with no meaningful need for extra fixed costs. It can also significantly reduce its marketing costs, by consolidating the 3 owned brands into one.
  • The emergence of a clear winner in Germany is likely to significantly reduce competitive intensity and allow Takeaway to scale back its pre-deal marketing investment level.
  • Finally, the added market clout may allow Takeaway.com to negotiate better take rates with restaurants.

The deal will lead to increased insider ownership in Takeaway. Prior to the deal, Takeaway’s management owned more than 34% of the company. They do not intend to sell a single share in the deal. Meanwhile, Delivery Hero will take part of the transaction proceeds in the form of an 18% ownership of Takeaway’s stock (which will dilute management’s stake proportionally).

While the deal is too small to fall under the automatic purview of the anti-trust authority, we can’t rule out an in-depth analysis of the deal to be conducted. Once this hurdle gets crossed, we expect the positive impact of the deal to begin to materialize.

Takeaway’s base business has continued to execute well. In further evidence of the different dynamics of secular growers and mature companies, Takeaway accelerated its order year over year growth from 34% in Q2 of 2018 to 40% in Q3 and 37% in Q4 of 2018. This despite a significant slowdown in the German economy which is reported to have declined -0.2% in Q3 and grown only 0.1% in Q4.

We look forward to continuing to update you on Takeaway’s progress throughout 2019.

 

Communication

We are looking to expand the avenues of communication between us and you. Starting in the first half of April we will host quarterly conference calls to provide a live update and answer questions. You can participate live through dial-in or by sending us your questions in advance.