Amazon and Grubhub cook up low cash diet plan

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Doordash and Grubhub delivery bags are seen on a bicycle in Brooklyn, New York City, U.S., May 9, 2022.

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NEW YORK, July 6 (Reuters Breakingviews) – Fast-growing companies often use their equity to compensate staff or make acquisitions. But when cash starts to get tight, why not pay vendors the same way? That’s effectively what food delivery service Grubhub is doing in Wednesday’s commercial tie-up with e-commerce giant Amazon.com (AMZN.O). It’s the kind of low-cash diet plan that Amazon can easily offer, and one many struggling technology companies would covet.

Grubhub, a U.S. takeout service owned by Just Eat Takeaway.com (TKWY.AS), is recruiting Amazon to procure new customers through its Prime offering. In return, Grubhub will give Jeff Bezos’ firm a slab of warrants – notes exchangeable for shares at a negligible price. Amazon gets the equivalent of a 2% stake up-front, rising to 15% if certain milestones including customer retention and order frequency are hit. In certain circumstances, it can take cash instead of shares.

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It isn’t the first such arrangement of this sort for Amazon – the company had $3.4 billion of other companies’ warrants on its books at the end of March. Such deals don’t always work out, though. Taking stock options or warrants can expose the recipient to big swings in value. Amazon took a $7.6 billion loss on its investment in electric-vehicle maker Rivian Automotive (RIVN.O) during the second quarter of 2022 – though Amazon is a customer of Rivian rather than a vendor. Still, helping Grubhub win customers will cost the $1.2 trillion online retailer next to nothing. It helps that Amazon’s involvement itself makes the warrants more valuable. Just Eat’s shares rose 16% on Wednesday.

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Paying cash to Amazon probably wouldn’t have been a great option for Grubhub. Just Eat said in the first quarter that orders at its North American business fell 5% compared with a year earlier, and the company’s operations consumed $423 million more cash than they brought in last year.

But it isn’t the only tech firm that could benefit from a deal of this sort. Companies in the United States managed to raise just $33 billion in equity issuance in the first six months of the year, according to Refinitiv – 85% less than a year earlier. Firms like exercise-bike maker Peloton Interactive (PTON.O), which have spent loads of cash on marketing to get customers on board, might also find merit in this kind of equity-for-services barter trade. As feast turns to famine, they have a new reason to get creative.

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CONTEXT NEWS

Amazon.com agreed to take warrants equivalent to a 2% stake in Just Eat Takeaway.com’s U.S. business Grubhub, in return for promoting the meal delivery service to its Amazon Prime premium customers.

The tie-up would pay Amazon in notes exchangeable into shares with a “de minimis” strike price. The company founded by Jeff Bezos will receive more warrants in Grubhub if it hits certain milestones, including delivery of specified user numbers, the frequency of their orders and how long they remain customers.

Amazon is eligible to receive warrants equivalent to a 15% stake in total, though has an option to receive cash instead of equity in certain circumstances.

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Editing by Lauren Silva Laughlin and Sharon Lam

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.





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