December 23, 2019

Breakingviews: UK $7 bln food fight’s final course: indigestion

by Fathom Consulting.

Having waited in hunger for months, Chief Executive Jitse Groen is finally ready to gorge on a 5.6 billion pound meal. Yet he’s paying far too much for British food delivery outfit Just Eat. And shareholders in the new, enlarged company are dependent on an overcooked valuation.

Groen on Thursday raised his all-share bid for the London-listed business, which hooks stay-at-home diners up with local burger joints and curry houses. He’s offering Just Eat investors 0.12111 new shares for each of their own. Adjusting for the Dutch group’s 11% share-price fall after Groen announced the new offer, that’s worth 8.16 pounds per share.

It’ll almost certainly beat a rival 8 pound per share cash bid from technology holding company Prosus. Roughly half of Just Eat shareholders had either accepted or committed to accept Groen’s offer on Thursday evening.

That’s where the good news ends for the Dutchman. Strip out Just Eat’s probable year-end net cash, and he’s paying 5.6 billion pounds. In return, he’ll get 287 million pounds of operating profit in three years’ time, using the average analyst estimate gathered by Refinitiv.

Add Groen’s 17 million pounds of annual cost savings, deduct tax, and the return on invested capital is 4% – thin gruel. To clear a typical 10% hurdle rate of return, Groen would have to crank up Just Eat’s operating profit to almost 700 million pounds – more than six times last year’s level.

If Groen is overpaying, surely it follows that Just Eat investors are getting a healthy meal? That depends. Since the offer is purely in shares, they’re relying on the Amsterdam-based group’s rich valuation.

It’s a risky bet. Just Eat shareholders will own 57.5% of Groen’s new group. For their holdings to be worth more than the 5.5 billion pound Prosus cash offer they look set to spurn, the new company’s equity value would have to be 9.6 billion pounds.

Take off debt, and that implies a 4.6 times 2021 revenue multiple, using Refinitiv estimates for the two groups. Listed peers Delivery Hero and GrubHub trade at an average of 3.3 times revenue. In other words, Groen’s deal looks like a recipe for indigestion all round.


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