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An Update On Jumia: In Coronavirus

Jumia is the probably most famous Africa startup in the past few years and went IPO last year.

I wrote about the potential e-commerce giant in a few blogs before.

On May 13, Jumia reported its 2020 Q1 earnings, which also provides a glimpse into African cities under coronavirus.

Source: Google

The market didn’t react positively after the earnings, but some opportunistic expectations had been built in before.

Although some numbers are not ideal and growth seems lackluster, I would argue in the next blog that Jumia has become a very different company than two years ago.

This post summarizes things that appear to be positive for Jumia, from its Q1 earnings and the shareholder letter in April, among other communications:

  • Partnership with Reckitt Benckiser, a global health products manufacturer selling through Jumia,  is financing free shipping nationwide (8 markets that Jumia operates) on all listed products; Jumia takes 0% commission. -> free marketing / user acquisition that ensures a good first online shopping experience; keep logistics team operate
  • Focusing on contactless delivery options & online payments. -> accelerating JumiaPay adoption when cash is still considered important; building trust, also encouraged by governments
  • Providing affordable basic foods and sanitary essentials. -> shaping perception on online shopping to everyday purchases
  • In South Africa, it launched Jumia platform with an assortment of essential products (Reckitt Benckiser and P&G) that can be delivered despite the lockdown (was selling fashions via Zando which is shut down).
  • Jumia Food pivots to grocery delivery
  • Increased demand from sellers to join the Jumia platform as offline distribution channels are largely disrupted – high-profile brands on Jumia Mall, including Coca-Cola and Nigerian Breweries in Nigeria, PepsiCo and Nivea (Beiersdorf) in Egypt.
  • Launched JumiaPay in Tunisia
  • Consumers can purchase game subscriptions or credit for in-app purchases on the JumiaPay app for popular games
  • Advertising services were available across 9 out of 11 countries, compared with 5 at the end of 2019 – in Q1 run campaigns for high-profile brands including Adidas, L’Oreal, Microsoft, Sensodyne and Mondelez
  • Volumes surged in some markets, such as Morocco and Tunisia, while limited in countries such as South Africa and Nigeria
  • The countries that have been the most severely affected by confinement measures have experienced a gradual volume recovery since mid-April, while the countries that saw a surge in volumes continued to experience robust momentum throughout April. Overall, in terms of items sold, we ended the month of April c.3% above the first week of March levels.
  • The United Nations Development Programme (UNDP) in partnership with Jumia Uganda, have launched an online platform – to enable small and medium enterprises to connect with consumers
    • Jumia will use its infrastructure which includes riders trained to provide safe and contactless deliveries, to provide a platform for the vendors to reach customers who are currently under lockdown.
    • Consumers will have the option of giving feedback on the level of satisfaction of both the product and the service through the Jumia Vendor App.
  • Jumia and Mastercard announced a partnership to incentivize the use of cashless payments platforms – consumers who purchase essential products using their Mastercard on the Jumia platform will receive up to a 10 per cent discount on their order

Things that are implying negative developments:

  • The early signs of the COVID-19 disruption were felt in our cross-border operations as a result of manufacturing facility shutdowns in China. Supply chain disruption in China also impacted our local sellers, many of whom source their goods from China.
  • Different forms of confinement measures have been affecting operations to varying degrees, food delivery business, brief closures of warehouse, sellers’ inability to deliver, etc.
  • Currently expect continued GMV weakness over at least the first half of 2020, with better Order and Annual Active Consumers growth, on a year-over-year basis.

 

to be continued…

「What’s News In China」

HK’s Hang Seng Index will incorporate Chinese internet giants Alibaba, Xiaomi and Meituan Dianping – companies with dual-class or equivalent structures, starting from August, with a weighting cap of 5%. The tech trio are also eligible to join the Hang Seng China Enterprises Index. The Hang Seng is tracked by $20 billion of exchange-listed products globally and $8 billion of local retirement plans, the index provider said in a consultation paper in January. // FT | Hang Seng Indexes

On May 18, HeyTea 喜茶 announced the roll-out of its first artificial meat product, partnering with Starfield 星期零. The 未来肉芝士堡 is priced at ¥25. // 36kr | WeChat

Before HeyTea, its competitor Naixue’s Tea also partnered with Starfield on artificial meat burger last November. Last month, Starbucks and KFC in China launched their artificial / plant-based meat products. // Sina | 36kr

ByteDance is marching into automobile sector with plans to integrate Douyin and Toutiao into cars. The research and development (R&D) team for the Internet of Vehicles (IoV) team are former employees of smartphone maker Smartisan 锤子手机, who joined the company after ByteDance acquired Smartisan (team & patents) in early 2019. // 36kr | kr-asia

Chinese black-box doll retailer Pop Mart 泡泡玛特 has raised more than $100 million in funding from China Renaissance and Loyal Valley Capital in what is expected to be its last round before an IPO. // avcj | 36kr

Airbnb’s IPO Plan & Capital Allocation

Airbnb did well in the past quarters before 2020 and doesn’t have much concerns for cash. It was one of the most financially healthy startup.

Actually, its full year earnings turned positive as early as 2017, when it generated earnings of about $100m while bookings grew around 150%. It became profitable in the second half of 2016.

In 2018, it made $93 million in profit on $2.6 billion in revenue.

More recently, it took in more than $1 billion in revenue in 2019Q2.

However, Airbnb racked up a $322 million net loss for the nine months through September, down from a $200 million profit a year earlier.

In 2019Q3 alone, Airbnb increased its revenue to $1.65 billion in the third quarter, up almost $400 million from a year earlier, one of the people said. But costs rose faster. Net profit for the quarter was $266 million – less than the $337 million profit for the same period in 2018

All sorts of reports said Airbnb is preparing to go IPO in 2020… until coronavirus hit.

When WSJ reported in Feb, it says Airbnb’s business in China is currently down about 80% compared with last year.

Now as travel industry worldwide is hit, Aribnb total revenue could decline 70-90% and might have cash flow problem.

It now has raised debt and cancelled summer internships.

In early April, Airbnb raised $1 billion in debt and equity from private equity firms Silver Lake and Sixth Street Partners.

Last week, Airbnb raised another $1 billion in debt. Fidelity, T Rowe Price and Blackrock are participating along with Apollo and Oaktree.

While Airbnb should be fine and solvent, how its revenue gonna recover & how to show its growth rate will be an IPO headache.

「What’s News In China」

On April 17, China 2020 Q1 GDP data is released. China’s economy shrank 6.8% in the first three months of 2020 compared with a year earlier, the first such contraction since Beijing began reporting quarterly gross domestic product in 1992. // WSJ

On April 15, China cut the benchmark interest rate for the second time this year, lowering the medium-term lending facility (MLF) for financial institutions to 2.95%. The one-year loan prime rate (LPR), based on banks quotations, was lowered by 20 basis points (bps) from 4.05% to 3.85%. // Reuters | PBOC

China’s central bank has introduced a homegrown digital currency across four cities as part of a pilot program. Internal tests of the digital currency are being conducted in four large cities around China—Shenzhen, Suzhou, Chengdu and Xiong’an, a satellite city of Beijing. // WSJ

As China is reopening its economy, getting consumers to spend is one of the key initiatives. Many cities collaborate with Alipay to give residents discount coupons for various needs. Wuhan, which reopened on April 8, on April 17 announced that it is going to offer coupons worth of 2.3 billion RMB for restaurant, shopping malls, grocery stores and other cultural/sports spendings. // cnbeta

「News of the Week」 Dow Jones Best Two-week Performance Since 1930s

WSJ – Dow Jones Industrial Average rose 2.2% this week, extending its rally over the past two weeks to 15%—its best performance since 1938

Things that pushed the market upward:

STAT – Early peek at data on Gilead coronavirus drug suggests patients are responding to treatment

White House – Reopening guideline

Texas Tribune – Texas to restart the economy, loosens some restrictions

Occidental Petroleum (4): Agreement With Carl Icahn, Oil Price Plunge

According to the 13F-HR, Icahn held 33,244,429, 26,332,388 and 22,571,854 shares of Occidental as of June 30, September 30 and December 31, 2019.

Icahn’s fifth message on February 12, 2020.

Things evolved fast in 2020.

Oil prices plunged in March as COVID-19 developed and a price war started.

Line chart of Brent crude ($/barrel) showing Oil price crashes 30% after Saudi Arabia launches price war

Oil plunges 24% for worst day since 1991 after OPEC deal failure ...

Occidental’s stock price closed at $12.51 on March 9, dropping 53.4% from March 6 and 60.3% from March 5. The ex-div date was March 9, with $0.79 dividend per share announced in February.

The following day (March 10), Occidental reduced to quarterly dividend to $0.11 from 0.79, effective July 2020.

It also reduces 2020 capital spending to between $3.5 billion and $3.7 billion from $5.2 billion to $5.4 billion and will implement additional operating and corporate cost reductions.

Meanwhile, Icahn boosted its ownership close to 10% of Occidental.

On March 25, both parties reached agreement. Occidental will add three new Icahn designated directors to Occidental’s Board.

The Icahn Group has withdrawn its slate of director nominees and stockholder proposals at the 2020 Annual Meeting and agreed to vote in favor of the Board’s director nominees and amendments to Occidental’s restated certificate of incorporation that enhance Occidental’s corporate governance.

Under the agreement, the Icahn Group will petition the Delaware Supreme Court to withdraw its pending appeal before the Court relating to the Icahn Group’s books and records request under Section 220 of the Delaware General Corporation Law.

At the same time, Occidental further cut the capital spending to between $2.7 billion and $2.9 billion from its original 2020 guidance of $5.2 billion to $5.4 billion. The Company also announced it will reduce 2020 operating and corporate costs by at least $600 million compared to the original 2020 plan, including significant salary reductions for executive leadership. Operating cost reductions are expected to lower 2020 domestic operating costs to approximately $7.00 per BOE.

To further reserve cash, on April 15, Occidental elected to pay a quarterly $200 million payment it owes Warren Buffett’s Berkshire Hathaway Inc. in common shares, at a 10% discount. Occidental could choose to pay Berkshire differently in future quarters.

Occidental 2019 full year financial result | Earnings call transcript

Occidental Petroleum (3): Sweetened Bid, Carl Icahn

The Sweetened Winning Bid

On May 5, 2019, as part of the financing plan, Occidental entered into an agreement with Total to sell Anadarko’s African assets for for $8.8 billion , contingent on successfully completing the acquisition of Anadarko.

The assets to be sold to Total represent approximately 6% of the expected net production and approximately 7% of the cash flow after capital expenditures of Occidental in 2020 pro forma for the acquisition of Anadarko.

At the same time, Occidental increased the cash portion of its $76-per-share offer to a level that would allow it to make a bid that does not require the approval of its shareholders. Under the new terms, the offer comprises $59 in cash and 0.2934 shares of Occidental common stock per share of Anadarko. (78% Cash and 22% Stock)

This modification (of not requiring a shareholder vote) would become one of the major arguments brought by Carl Icahn later on.

Vicki Hollub, CEO of Occidental, also explains in her letter to Anadarko’s Board,

Our revised proposal does not require an Occidental shareholder vote, which has been repeatedly cited as the explanation for why you previously chose Chevron’s $65 offer over our $76 offer

Plus, the $1 billion breakup fee would be borne by Occidental after the acquisition.

The bidding war didn’t escalate.

On May 9, 2019, Occidental won the battle for Anadarko as Chevron exited bidding.

“Costs and capital discipline always matter,” Mr. Wirth said. “An increased offer would have eroded value to our shareholders.” Shares in Chevron rose 3.1% on Thursday. Occidental’s stock fell 6.4%, while Anadarko’s shares declined 3.2%.

Shareholders’ Discontent & Carl Icahn Coming

Along the bidding process, on the day (April 30) that Occidental secured Berkshire’s money, T. Rowe Price Group, one of the largest shareholders of Occidental Petroleum, says it opposes the energy company’s proposed merger with Anadarko Petroleum.

We think there is significant execution risk with the Anadarko deal and it would increase Occidental’s financial leverage significantly as well.

– John Linehan, manager at T Rowe Price Equity Income fund

On May 3, Bloomberg reported that Carl Icahn had built a small stake in Occidental Petroleum Corp.

Some investors expressed their intention to vote against approving Occidental’s Board.

At Occidental’s annual meeting in Houston on Friday (May 10), a proposal cutting the percentage of shareholders required to call a special meeting (from 25% to 15%) was backed by investors speaking for 60% of the shares voted, in defiance of opposition from Occidental’s board.

On May 30, Carl Icahn sued Occidenta over its acquisition of Anadarko, calling its $38 billion deal to buy Anadarko Petroleum Corp. “fundamentally misguided”.

Icahn argus that the Purchase is a Levered Bet on the Price of Oil, as Occidental’s debt (and debt-like preferred stock) increases from approximately $10 billion to over $45 billion.

The Icahn parties estimate that if the price of oil declines to approximately $45 per barrel or below for an extended period of time, Occidental might be forced to cut the common dividend. The warrants given to Berkshire alone were worth approximately $1.2 billion on the day the preferred deal was announced. And the singular focus to win the Anadarko bid at any cost prevented Occidental from
maximizing value in its sale of Anadarko’s African assets. [Court Document]

However, the complaint was to seek certain books and records relating to the Anadarko acquisition, etc. And eventually, in September 2019, the court ruled in favor of Occidental.

On June 26, in a preliminary copy, Icahn called for a special shareholder meeting where he plans to oust and replace four Occidental directors and change the company’s charter through a stockholder consent solicitation to prevent it from ever engineering a similar takeover again. [Icahn Solicitation Statement – Preliminary] [Icahn Solicitation Statement – Definitive]

On July 22, Icahn published an open letter to Occidental shareholders, four days after the definitive proxy statement was filed.

On August 8, Occidental announced that it has completed the acquisition of Anadarko.

[Icahn’s second and third open letters on August 13 and August 28]

In the third letter, Icahn opposed the two new board members (not in Icahn’s slate) proposed by Occidental.

On November 8, in his fourth open letter,

Earlier this year we owned over 33 million shares of OXY, but recently we reduced the size of our investment.  I still own almost 23 million shares, valued at almost $900 million, but this has become a very risky investment and without changing the incumbent Board and potentially the CEO, and in the absence of accountability for the OxyDarko Disaster, I am very concerned.

We fully intend to run a proxy fight, and if elected, work to right this teetering ship.

Occidental Petroleum (2): Topping Chevron’s Bid For Anadarko, Buffett’s Preferred Investment

Occidental Bids Anadarko Petroleum (APC)

Having grown into the No.1 operator in Permian in 2018Q4, Occidental definitely don’t want give that title back to Chevron.

While acquiring Anadarko is an add-on for Chevron, it’s much more financially challenging for Occidental.

Source: Chevron

Occidental produces at a similar scale as Anadarko. So it’s presumably an acquisition that would double its size.

But Occidental moved decisively. It offered $76.00 per share for Anadarko on April 24, 12 days after Chevron’s announcement, with ~17% premium over the $65 per share agreement. Taking into account the stock price movement, Occidental’s deal presents a ~20% premium.

Occidental’s offer also has more cash component (50/50) – $38.00 in cash and 0.6094 shares of Occidental common stock per Anadarko share, valuing Anadarko at $57 billion.

Occidental also argues a $3.5 billion free cash flow improvements through synergies and capital reduction, compared with Chevron’s $2 billion / year synergies.

Occidental actually tried to acquire Anadarko earlier in April, according to the press release later on.

It is unfortunate that Anadarko agreed to pay a break up fee of $1 billion, representing approximately $2 per share, without even picking up the phone to speak to us after we made two proposals during the week of April 8 that were at a significantly higher value to the transaction you were apparently negotiating with Chevron.

We noted to you on April 8 that our due diligence is complete. As you are aware, our financial advisors are BofA Merrill Lynch and Citi, and our legal advisors are Cravath, Swaine & Moore LLP, and we and they are available to discuss any aspect of our proposal. We and our advisors have reviewed your merger agreement with Chevron. We are separately sending to you and your legal advisors a form of merger agreement on that basis which we would be prepared to enter into, subject to our agreeing to the disclosure schedules to be attached, together with a copy of our financing commitment letter.

Financing The Acquisition

Acquisition of this size is difficult for Occidental, especially as it offers much more cash than stocks.

In 2018, Occidental generated $7,669 million operating cash flows with $(4,975) million CapEx. It also paid $(2,374) million in cash dividend and bought back $(1,248) million stocks.

On its balance sheet as of the end of 2018, it had $3,033 million cash, and $10,317 million long-term debt.

On April 30, $10 billion financing was secured as Buffett came on board.

Berkshire Hathaway, Inc. has committed to invest a total of $10 billion in Occidental. The investment is contingent upon Occidental entering into and completing its proposed acquisition of Anadarko. Berkshire Hathaway will receive 100,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share, together with a warrant to purchase up to 80.0 million shares of Occidental common stock at an exercise price of $62.50 per share.

The preferred shares also have a dividend rate of 8% per year.

As WSJ describes, the investment “is straight out of Warren Buffett’s playbook“. During and after the financial crisis, Berkshire acted as a lender of last resort for blue-chip companies including Goldman Sachs, General Electric and Bank of America.

Occidental marks Berkshire’s largest purchase of preferred shares; the 2013 Heinz deal has $8 billion preferred stocks and other securities.

Berkshire’s Preferreds | Source: WSJ

Mr. Buffett and Occidental have some shared history.

Mr. Buffett’s first stock purchase was three shares of Cities Service preferred stock when he was 11 years old. Occidental’s chief executive, Vicki Hollub, started her career at Cities Service, which was later acquired by Occidental. Cities Service is now called CITGO Petroleum Corp. and owned by Venezuela’s Petróleos de Venezuela SA.