|18 November, 2019

Just Eat M&A takeout is best served with cash

Just Eat’s growth is slowing as aggressive rivals Uber Eats and Deliveroo expand

Signage for Just Eat on the window of a restaurant in London, Britain, August 5, 2019.

Signage for Just Eat on the window of a restaurant in London, Britain, August 5, 2019.

Reuters/Toby Melville.

LONDON  - Just Eat investors have a choice of two dishes. One is a 4.9 billion pound ($6.3 billion) cash offer from tech conglomerate Prosus . The other is an all-share bid served up by Takeaway.com’s Chief Executive Jitse Groen. The latter could conceivably be worth more in a few years. But given food delivery’s questionable economics, it’s safest to take the money and run.

Groen this summer agreed to pay one-tenth of a Takeaway.com share for each share in the British company. That 7.31 pounds per share offer was worth 6.55 pounds when the market closed on Friday, after a fall in the Dutch group’s value and a rise in the pound. Prosus, a spinoff of South Africa’s Naspers , has offered 7.10 pounds in cash.

There’s a case for taking the lower offer. Groen, who would lead the combined group, is one of the few meal-delivery CEOs set to achieve rising double-digit growth rates and positive free cash flow this year. With the Just Eat merger, he hopes to put together three profitable and complementary takeaway businesses in Britain, Germany and the Netherlands, and cut 20 million euros of annual costs in the process. That may be an enticing prospect for the 35% of Just Eat investors who already own shares in Groen’s company.

Yet his promise of succulent meals a few years hence is unconvincing. Just Eat’s revenue would be two-thirds of the new group’s 2021 total, using Refinitiv estimates. Its growth is slowing as aggressive rivals Uber Eats and Deliveroo expand, and the company needs to invest heavily in a bigger UK delivery fleet. Operating profit will fall 22% this year, analysts reckon. Shares in profitable U.S. peer GrubHub recently dropped 40% in a day, after it said competition was hurting order growth. Just Eat investors who take shares in the new Anglo-Dutch group might one day experience something similar.

Is there room for a price bump? Investors hope so, with Just Eat’s shares trading 5% above Prosus’s offer. It would probably be a small one, however: Groen is already offering more than the value of his own company, and Prosus is set to make an unpalatable 4% 2021 return on invested capital, according to Breakingviews calculations. Prosus CEO Bob van Dijk will therefore struggle to make the deal work financially. But that’s his problem. Just Eat investors should bite his hand off.

CONTEXT NEWS

- Takeaway.com Chief Executive Jitse Groen on Nov. 13 said he didn’t want to overpay in an all-share merger with British food-delivery peer Just Eat, despite a higher cash offer from rival Prosus.

- “I don’t want to be the idiot that runs into a ratio that doesn’t make any sense,” he said, referring to a possible increase in the number of Takeaway.com shares offered to Just Eat investors.

- Prosus, a spinoff from South Africa’s Naspers, made an all-cash bid to buy Just Eat for 7.10 pounds per share. Groen’s Netherlands-based company is offering just under one-tenth of a Takeaway.com share in exchange for each share in Just Eat. That offer was worth 6.55 pounds on Nov. 15. Just Eat shares closed at 7.49 pounds on Nov. 15.

(Editing by Liam Proud and Oliver Taslic)

© Reuters News 2019

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