Just Eat Takeaway's Bid For Global Dominance
Background
April 2020 saw the approval of the Just Eat-Takeaway.com (JET) merger that would create one of the world’s largest food delivery companies.
Early Stages Of The Deal Process
In December 2019, Prosus and Takeaway.com both tabled their final offers for Just Eat. Prosus, the international investment unit of Naspers, the South African internet conglomerate, made an all-cash deal1 and valued Just Eat at €6.1bn. Takeaway.com submitted its final offer, being an all-stock2 merger offer and valued Just Eat at €6.6bn.
Takeaway.com then came out on top after getting the stamp of approval from Just Eat’s shareholders. Investors holding stock worth more than 80 percent of Just Eat accepted Takeaway.com’s all-share offer [1].
Jitse Groen, the founder and chief executive of Takeaway.com, who is set to lead the new combination, said at the time of making the final offer “the all-share combination establishes the largest global platform in online food delivery outside China and allows shareholders of both Just Eat and Takeaway.com to benefit from significant long-term value creation” [2].
Deal Rationale
The key driver of this merger is that it creates one of the world’s largest online food delivery platforms with a combined 355 million orders being processed annually worth €7.3bn. The combined entity is set to serve 20 countries and will have strong leadership positions in many of the world’s largest food delivery markets, including the UK, Germany, the Netherlands and Canada [3].
The food delivery industry has seen a sharp rise in growth as a product of the Covid-19 pandemic. Stay-at-home orders have been the reason for this, as a large number of countries have been in lockdown. Due to the market pressure for higher revenues, there has been an increase in demand for M&A and further consolidation in this industry. JET believes that once Covid-19 restrictions are relaxed, we will see a permanent shift in consumer behaviour. This would help the firm meet its goal of sustained growth.
With the combination of JET’s capital and resources, they can now further strengthen their position as market leaders and capitalise on other opportunities such as different geographical markets.
There is now greater operating leverage3 with a greater ability to leverage investments. This can be used to further innovate, improve and invest in technology, marketing and restaurant delivery services. These additional investments are necessary to succeed and grow to be a food delivery giant, as the industry is highly dynamic with strong competition from the likes of Uber.
Annual cost savings of this merger in order centralisation, improvements in logistical processes, and brands being made one are around the €18m figure. The merged company also announced that €700m in outside funding had been raised in the form of new shares (€400m) and convertible bonds4 (€300m). The additional funds will be used to pay down debts, business development and other corporate purposes. They would also be used for potential acquisitions in Europe or elsewhere. This has already been seen with JET’s acquisition of US food delivery platform, Grubhub, which was announced in June 2020. Further capital will be raised with the sale of Just Eat’s 33% stake in Brazil’s iFood, a delivery joint venture operated with rival bidder, Prosus. The firm said that half of the net proceeds from the sale would be returned to shareholders of the combined group [4].
Uncertainties Surrounding The Deal
There is always a risk of whether the companies in a merger will be able to successfully integrate. With technology being integral to these companies’ operations, there is uncertainty about whether their apps can be used together.
Additionally, as mentioned earlier, the increase in stay-at-home orders as a result of the Covid-19 pandemic has seen a sharp rise in short term demand. However, this may just be a temporary shift in consumer behaviour and once the pandemic is over there may be a return to pre-pandemic patterns.
JET Bidding For Global Dominance
JET acquired 100% of the shares of Grubhub, one of the largest US food delivery platforms for $7.3bn. The acquisition will create the world’s largest food delivery company outside of China. It allows JET to enter one of the largest profit pools in the food delivery industry – the US.
This followed talks of a potential merger with Uber and Grubhub that broke down due to regulatory concerns. If Uber had been successful in acquiring Grubhub, they would have almost 80% market share in cities such as New York.
There is uncertainty with this deal though, as an RBC analyst said, “the lack of geographical overlap between JET and Grubhub means that the marketing efficiencies from consolidation to be gained are limited.” And this acquisition will do relatively little to change the landscape of the US food delivery market [5].
However, Matt Maloney, CEO of Grubhub, said, “this deal is about growth” [5]. In the US food delivery market, it is very hard to gain market share and it requires significant investment to gain and retain customers. With this acquisition, Grubhub is now in a stronger position to chase market share. Furthermore, the food delivery market is expected to more than double in gross revenue by 2025 [6]. Hence, with Grubhub being the North America market leader and JET having the largest share of the UK market, it is going to be very hard to outcompete the group.
JET and Grubhub are also a very good cultural fit and they both have been consistently EBITDA positive. JET also owns SkipTheDishes, a Canadian food delivery company, thus benefiting from significant synergies by combining operations. The benefits also include the network effects, growth in the selection of restaurants and therefore, customer base. This would allow JET to improve long term profitability.
The company is built around four of the largest profit pools in the global food delivery industry: the Netherlands, Germany, the UK and the US. There are large opportunities for further growth for the group. With the now larger amount of resources and a stronger global position, JET has an opportunity to leverage investments, particularly in marketing, technology and delivery services.
Conclusion
The food delivery market is regarded as one where the winner takes all. This means that the largest player will experience superior returns in comparison to competitors and will be difficult to outcompete. With Just Eat and Takeaway.com merging and then acquiring Grubhub, the combined group is now the second-largest food delivery company in the world, behind only Meituan, Chinese food delivery company. This will bring significant benefits in the short run and the long run. With their combined capital the company can increase market share aggressively and further cement its position as market leader.
It is also important to see how the competition responds in this rapidly changing industry. Uber aimed to further consolidate their position as global market leader, so despite their proposed deal with Grubhub failing to complete, Uber instead acquired Postmates for $2.65bn [7]. This will create the second-largest food delivery company in the US, overtaking Grubhub. The acquisition, however, is yet to be approved by regulatory bodies. Uber is far from profitable and this deal further reduces their profitability in comparison to JET who is and also has a positive EBITDA.
With JET’s profitability, it’s position as the largest global food delivery company outside of China, and its combined resources allowing it to further increase its market share, the prospect of competitors catching up with JET seems to be unlikely in the near future.
Glossary
1 All-cash deal: This type of deal is an exchange of an asset for cash without any other monetary methods being used, for example, the exchange of stock. If the acquiring firm in an acquisition does not want the target firm to have any voting rights or own any of its stock, it can offer this type of deal [8].
2 All-stock deal: This type of deal is where shareholders of the target firm receive shares in the acquiring firm as payment, instead of cash. All-stock deals can be used when shareholders of a target company would rather obtain ownership in the acquiring company rather than receive a cash settlement [9].
3 Operating Leverage: This measures the degree to which a firm can increase its operating income by increasing its revenue [10].
4 Convertible Bond: A fixed-income corporate debt security which yields interest payments and can also be converted into a predetermined number of common stock or equity shares [11].