June 11, 2020 / 3:45 PM / a month ago

Breakingviews - Just Eat investors may refuse to swallow Grubhub

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

LONDON (Reuters Breakingviews) - Just Eat Takeaway.com’s Chief Executive Jitse Groen will have to face down his own shareholders to get what he wants. The billionaire entrepreneur’s Anglo-Dutch company on Wednesday agreed to a $7.3 billion all-share acquisition of U.S. meal-delivery peer Grubhub. Investors in the $14 billion buyer have both the means and motive to veto it. 

Groen and his opposite number at Grubhub, Matt Maloney, have built relatively similar businesses on either side of the Atlantic. Both Just Eat Takeaway and Grubhub have their roots in the “marketplace” model – where restaurants pay a small fee to connect with diners using the app, but have to organise their own transportation. The pally pair reckon that an enlarged group will be better able to fend off hyper-aggressive rivals like Uber Technologies.

Just Eat investors could break up Groen and Maloney’s love-in. Shares in the Netherlands-based company fell 13% on Wednesday and a further 2% on Thursday, wiping almost $2.5 billion off the would-be buyer’s equity value. Shareholders may be worried about the low returns from buying into the uber-competitive U.S. market. 

They’d be right. Generously assume that Grubhub’s revenue grows 15% a year, starting with the $1.5 billion that analysts are pencilling in for 2020, using Refinitiv Smart Estimates. Sales would be $3.1 billion in 2025. Next assume that Groen and Maloney can raise Grubhub’s operating margin to 25%, compared with an expected operating loss this year. That would imply $779 million of operating profit in five years. Deduct tax at 21%, and the return on invested capital would be $615 million, or 8% of the $7.5 billion purchase price, which includes analysts’ mid-year estimate of net debt. Since the cost of capital in the cut-throat meal-delivery sector is probably closer to 10%, Groen’s plan implies epic value destruction. 

Luckily for investors in Just Eat Takeaway, the Dutchman needs the support of shareholders who own 50% of the company plus one share to get his deal through. Groen has a roughly one-tenth holding, so an organised rebellion at a shareholder meeting, expected in the second half of 2020, could stop him. The view of Germany-based peer Delivery Hero, a 10% shareholder, will also be crucial. Just Eat Takeaway investors can avoid being force-fed.

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