Prosus has no intention of upping its 710p a share hostile bid for British food delivery business Just Eat.
Given the wreckage in global food delivery counters currently, it’s amazing that investors seem to think a higher price might be needed to beat off the merger attempt by UK-based Takeaway, which is supported by the Just Eat board.
But Prosus CFO Basil Sgourdos says the offer presents fair value, and gives Just Eat shareholders certainty.
Sgourdos believes the financial markets are "underestimating the investment needed to realise Just Eat’s potential" and used this week’s engagement with journalists to remind everyone of the importance of having a wealthy, experienced controlling shareholder.
Still, that remains of cold comfort to many local investors, aghast that the 710p offer means an overall price tag of around R94bn.
Prosus argues that Just Eat needs substantial investment in products, technology, marketing and own delivery facilities, and that "underinvestment in these areas is why competitors have been able to steal market share from Just Eat", says Sgourdos.
Not everyone agrees the potential benefits used to justify Prosus’s price tag are realisable.
Protea Capital Management CEO Jean Pierre Verster accepts there are substantial network effects in some web-based platforms — but not in food delivery. "I can see how the winner-takes-all scenario works in online payments and online classifieds advertising, but there’s no reason why it would work in food delivery," he says, adding that if there is no network effect it makes little sense to pay such a steep price for Just Eat.
London-based Olive Tree Capital says Prosus could be under some pressure to up the offer because everyone knows how strong its balance sheet is.
"Their ability to pay an additional premium to secure a recommendation is where [Just Eat] shareholders should focus," suggests Olive Tree, adding that Takeaway’s size and limited ability to offer a premium to the 710p offer restricts its ability to compete with the Prosus offer.
Remarkably, Prosus’s publication of the details of its cash offer describes a situation that reads more like a rescue bid than a transaction that requires a steep premium.
Sgourdos reckons the financial markets are underestimating the urgency and scale of the transformation needed at Just Eat, and says the risks facing it are similar to those faced by Grubhub in the US.
Grubhub’s recent meltdown — its share price tanked 43% in one’s day’s trading in October — seems to reinforce Verster’s reservations about the existence of an influential network effect when it comes to food delivery.
With over 30% of the US food delivery market, Grubhub was thought to be in an unassailable position. That was until late October, when it announced below-expectation earnings.
Uncertainty over the company’s new strategic plan, increased competition and decreasing margins were just part of Grubhub’s problems; there was also increasing scrutiny from regulators as well as growing tension with restaurant owners.
Grubhub’s recent experience suggests it’s near impossible to secure customer loyalty in food delivery, with the company’s own data indicating that customers frequently order on multiple platforms. And then there’s the move by the New York regulators to cap Grubhub’s commission at 10%; currently commissions run to as high as 30%.
As if that weren’t enough, there’s also the matter of the multimillion-dollar lawsuit filed in the US accusing Grubhub of charging fees to restaurants for orders that never happened.
Closer to home, for Just Eat, is the news that Deliveroo, one of the largest food delivery services in the UK, has introduced a "food collection service", which allows customers to pick up their own meals without paying riders to deliver them. In other words: a food delivery service that doesn’t deliver food.
Deliveroo is struggling to fund its ambitious growth plans, and plans for a much-needed injection of $575m, led by Amazon, were recently blocked by the UK’s Competition & Markets Authority (CMA).
The CMA has launched an inquiry into the proposed Amazon investment to determine whether it could harm investors.
Amazon’s own foray into food takeaway delivery in Britain, Amazon Restaurants UK, was canned in December 2018 just two years after launch.
All in all, it’s difficult to imagine why Just Eat shareholders wouldn’t jump at the Prosus offer. Then would come the really tough part — Prosus demonstrating to its shareholders why the business justified the R94bn price tag.
