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M&A Deals

Just Eat goes Dutch with Takeaway.com

On 23rd April 2020, the CMA, a government regulatory body charged with promoting domestic competition, announced their approval of the prospective £6.2 billion merger of Just Eat and Takeaway.com. Following the exit of Takeaway.com from the UK online food delivery market in 2016, the CMA concluded the firm would be unlikely to re-enter the market should the deal not be approved. The announcement followed a lengthy procedure, during which Prosus, a private equity firm, made a hostile bid in response to the initial Takeaway.com offer. Following revisions on behalf of both companies, the board of Just Eat recommended the Takeaway.com offer to shareholders, at a 25% premium to the initial bid, favouring its long-term potential. The deal initially valued Just Eat shares at 916p each, but the response of the market through a fall in Takeaway.com stocks of almost 10%, eroded this.

Just Eat has a history of increasing market share and strong profitability. However, the firm has suffered recently owing to market entrants such as Uber Eats and Deliveroo. UK market share dropped from 30.9% in 2016 to 8% in 2019, as Just Eat lost leading positions in 5 markets. Increased competition has forced loss-taking business models industry wide, reliant on customer subsidies to promote revenue, as companies prioritise gaining market share. Venture capital and private equity investors, such as Prosus, have financed this; in Europe in 2019, over €1.6bn was invested into food logistics and delivery businesses. Given the data, the demand from investors is no surprise. According to Deloitte, European online food delivery is experiencing double digit growth and is predicted to be worth $25 billion within three years. 

But the industry is still young; both Just Eat and Takeaway.com, market veterans, were founded only two decades ago. There is consensus that in order to reach full potential, firms must take advantage of consolidation opportunities. The motivation of Takeaway.com is palpable. Increased customer base and higher market share will place the firm in an ideal position to outperform competitors.

Initial analysis provides a promising outlook. The Just Eat Takeaway (JET) model is based on a centralised organisation structure, emphasizing investment in marketing to create a unified brand. Separately, thecompanies primarily relied on restaurants to provide delivery services, and the simplicity of this structure will likely increase synergies. Concerning growth strategy, the business announced an intensive investment programme focused on core markets with high consumer density. Just Eat mainly operates in France, Spain and UK, whereas Takeaway.com is more prominent in Germany and East Europe.

Figure 1: Online food delivery, by major economy, 2023, Europe
Source: Deloitte

This is significant given the size of these markets (Figure 1) which allows the merged firm to maximise its customer base. JET has also responded to competition by investing in their own couriers, and increased financing is likely to allow the firm to do so competitively. This flexibility will reduce costs and, therefore, support more competitive pricing. Uber Eats and Deliveroo charges can be in excess of 35%, whereas JET only charges 10-15%. Business process consolidation is expected to reduce annual costs by £20 million and the extensive experience of inorganic growth within JET’s Executive Team bodes well for these savings to be realised. 

True to the nature of the two firms, external growth did not stop there. Upon CMA approval, the company announced that it had raised €700 million in outside funding, partly to provide “financial flexibility to act on strategic opportunities”. Only 6 months later, JET acquired Grubhub, outbidding Uber Eats to secure a 20% share of the American market. The reaction to this transaction was adverse, as JET stocks dropped 13% once knowledge of the talks became public. This may have been a result of the short time period between the two transactions, raising questions concerning the effectiveness of unification, or perceived limits to synergies between JET and Grubhub. However, there are likely to be strategic efficiencies between Grubhub and Skip The Dishes, a Just Eat owned Canadian firm. Furthermore, the deal created the largest western food delivery company; this offers promising growth prospects, as the firm is ideally positioned to maximise global market share.

Figure 2: Takeaway.com revenues (€ millions)
Source: Dealroom.co

Following immediate integration cost losses, combined with the acquisition of Grubhub, coronavirus had a significant influence on the short term performance of JET. National lockdowns increased demand for online food delivery. The company experienced growth in number of orders placed of 46% in Q3 2020 versus Q3 2019. This contributed to a 44% year on year increase in revenue for 2020, as the merged firm was able to capitalise on the response from a widened consumer base, evidenced in Figure 2. An 8% jump in JET shares demonstrated the confidence of investors. However, the question remains as to whether this depicts a permanent trend or a situational consequence.

Going forward, two growth opportunities have emerged which are set to change the nature of the industry. Dark kitchens, run solely to produce take-away food, provide one example. Deliveroo and Glovo have already started running their own sites, in return for extra commission or rent from restaurants. Another future growth trend is that of online grocery deliveries. Both will allow food delivery companies to move away from the low margins associated with restaurants, therefore providing a crucial business opportunity.

The strong market share and perceived synergies created by the JET merger places the company in a promising position to succeed in one of Europe’s fast-growing industries. However, it remains to be seen to what extent integration of the two firms, as well as the acquisition of Grubhub, will realise cost reductions. The future success of the firm is also largely dependent on its ability to take advantage of its consumer base in capitalising on market trends likely to provide higher margins. The potential benefits for shareholders are clear and the Board of JET, just like one of their own couriers, now needs to deliver these on time, negotiating the traffic of a congested market and uncertain economic headwinds.

Sources

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