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The Fight to Win the Hunger Games

By Julius Kalvelage

In the food delivery industry, M&A activity and valuations have been at very high levels over the past years. There are three main aspects of the market that make companies attractive investments - the industry’s growth that offers upside potential, the technology-based business models that open doors for different opportunities in the future and the fierce competition that incentivises consolidation. An example of the trend’s implications can be the German food delivery market. In 2017, the main players were Lieferando, Delivery Hero, Deliveroo and Foodora. By 2019, there was only one choice left, being Lieferando.

Trend Drivers

There are different reasons for the M&A that firms engage in.

Firstly, M&A in this sector is strong because companies are an attractive investment due to the market’s strong growth. The industry is of course still new and up-and-coming and some investors see it as a “once in a generation shift in consumers´ eating habits” which implies an unsaturated market and a large upside potential. Frost & Sullivan, for example, assumed that the industry size would more than double between 2018 and 2025. As a result, M&A activity in this sector has been strong over the past years.

Secondly, many of these companies are also attractive investments because of their technology-reliant marketplace business models. Marketplace businesses such as Just Eat, or Grubhub rely on restaurants to deliver to customers, thus not employing costly in-house delivery services like Deliveroo or Uber Eats. This technology-reliance has resultantly improved the prospects of these companies and has even more upside when investors consider the potential enhancements in service quality that can be driven using consumer’s data.

Lastly, there is a lot of consolidation in the sector that is to a large part driven by what chief executive Jitse Groen called “unprecedented competition”. There are virtually no switching costs for customers and with an identical set of restaurants that one can order from, competition for market share can be fierce. “We at have witnessed the competitiveness of this industry” said Mr Groen, “as many of our competitors have gone bankrupt. This is an inherently difficult industry that requires a thorough understanding of how to make money.” Even Amazon shut down its food delivery platform Amazon Restaurants in the US and UK. Scale in this industry is thus of utmost importance which encourages companies to engage in M&A. “The problem you face with delivery is ensuring that you gain enough drops per hour to establish profitability. By opening it up to groceries, or non-takeaway food, you may gain more orders, but these may not overlap, which will just add extra costs,” said James Lockyer, an analyst at Peel Hunt.

Outlook and Current Relevance

Nowadays, the trust in apps and the reliance on them is high. The user experience has improved and consumers feel increasingly comfortable in the data-security that apps can achieve. At the same time, the level of the technology – in the form of for example payment options – has also improved, thus making the usage of such systems more efficient.

Main Players

With almost €40bn in merchandise value, Meituan from China is the biggest player worldwide. After closing the transaction, it will be followed by the combined company Just Eat The remaining largest companies are shown in the graphic below.

Key M&A Example

Just Eat plc. is an online food delivery service coming out of the UK that operates in the majority of Europe, Australia, Canada and parts of South America. In July last year, it published the composition of an all-stock merger with its Dutch counterpart Four months later, the international deal-making and e-commerce arm of the internet giant Naspers announced an unsolicited cash offer for Just Eat. Following a small bidding competition, won shareholder approval for the takeover in January, valuing Just Eat at $8.24 bn which corresponds to a 8.7x Sales Multiple and 61.5x EBIT multiple. With a premium of 44%, the implied multiples for a 0% premium transaction are 6.0x and 42.7x respectively which indicates the high valuation levels in this industry. Correspondingly, this transaction is a good depiction of the ongoing trend in this sector that leads companies to compete intensely for new market share, resulting in M&A activity.

Other Examples

Uber Eats India / Zomato

Sell-side Advisors: AZB & Partners

EV: $351m

Rationale: The transaction will enable Zomato to strengthen its presence in South India and increase its market share to 52%

Post completion, Uber is likely to focus on local rides business

DoorDash / Uber

During the last year, Uber and DoorDash held talks to combine. These have, however, not reached a profound stage yet. DoorDash was valued at $12.6bn in its last funding round in May 2019. In February 2020, Doordash filed for an IPO. / Just Eat

Sell-side Advisors: Goldman Sachs, Oakley Advisory, UBS

Buy-side Advisors: Bank of Amerika, Gleacher Shacklock, Lazard

EV: €7.4bn

EV/Sales: 8.7x

EV/EBITDA: 42.5x

Rationale: Become the world´s largest delivery player outside of China

Become a market leader in 15 of the 23 countries and a strong #2 in the other markets

Access to new large markets, such as the Netherlands and Germany in which they will be the number one player

Providing additional capital and resources to advance their competitive position supported by operating leverage / Foodora and Lieferheld from Delivery Hero

Sell-side Advisors: Morgan Stanley

Buy-side Advisors: ABN AMRO, Bank of America, ING

EV: $930m

Rationale: The transaction will provide with a stronger proposition for both consumers and partner restaurants in the German market.

It will also allow to operate on a large scale and increase its orders in Germany.

The transaction will benefit Delivery Hero in following ways:

The year-on-year orders growth would increase from 46% pre-transaction to 50% post-transaction for the 9 months ending 30 September 2018

The year-on-year merchandise value growth would increase from 38% pre-transaction to 42% post-transaction for the 9 months ending 30 September 2018.

The year-on-year constant currency revenue growth would increase from 66% pre-transaction to 77% post-transaction for the 9 months ending 30 September 2018.

The equity consideration received by Delivery Hero will benefit it to participate in any value creation that may generate.

This divestment transaction will increase Delivery Hero’s available cash from EUR 500m to EUR 1bn approximately.

Delivery Hero / Woowa Brothers

Sell-side Advisors: Goldman Sachs, JPMorgan

Buy-side Advisors: Morgan Stanley

EV: €3.6bn

EV/Sales: 14.0x

EV/EBITDA: 71.0x

Rationale: The Transaction reinforces Delivery Hero's commitment to expand into fast-growing Asia and solidifies its position as the largest global food delivery platform, outside of China by number of orders

Woowa is very attractive due to its unique market position in Korea and its strong growth of 96% yoy in 2018

Delivery Hero SE / limited / Just Eat

Sell-side Advisors: Goldman Sachs, JPMorgan Cazenove

EV: €287m

EV/Sales: 9.9x

Rationale: The transaction helps Just Eat's in accelerating its growth and increasing its market presence. The divesture of hungryhouse will rationalize Delivery Hero’s global footprint and enables them to focus on their operating market leading brands globally. / Alibaba

Sell-side Advisors: Hina Group

EV: €7.7bn

Rationale: The transaction helps Alibaba to expand in China’s fast-growing market for local delivery for food and other markets. It also allows Alibaba to promote its payment services

Other deals include the buy-out of Hungryhouse for £200m by Just or the acquisition of Eat Eat24 by the American Grubhub for $282 in 2017. In December 2018, a stake in the Indian food delivery service Bundl Technologies was bought for a billion dollars and also, an undisclosed stake in DoorDash was bought by a consortium of SoftBank, The Wellcome Trust, GIC and Sequoia for $535m. Lastly, at the end of 2019, GPI Capital bought an undisclosed stake in Postmates for $225m.


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