By Maria Lovin, Orlando Poraqi, Masem Abbas and Kristofer Gvenetadze. (UCL and Bocconi University) - Date: 23/03/2019
Overview of the deal
Target: Delivery Hero
Estimated value: €930m
Announcement date: 21-12-2018
Acquirer Advisors: Bank of America Merrill Lynch
Target Advisors: Morgan Stanley
The Dutch food delivery giant is acquiring its competitor’s German business, consisting of Delivery Hero Germany, Food Panda and Pizza•de, for €930m. The agreement consists of €508m in cash secured through the bridge financing of €680m and an 18% equity stake in the company worth c. €422m at a share price of €44,4.
The transaction has already been approved by the extraordinary general meeting, during which it was also agreed upon to set a break fee of €9.3m in case specific conditions of the resolutions have not been met by expected completion on 1st of June 2019.
Delivery Hero is planning to reinvest €508m of the cash paid in further acquisitions of international delivery companies.
“This transaction delivers a great deal of benefits to the Company and makes us better positioned. We will not only achieve but even exceed our revenue targets for 2019, notwithstanding the deconsolidation of the German business. At the same time we will hold a stake in Takeaway•com and have a significantly better cash position – the latter allowing us to reinvest at attractive returns. We are very excited by the huge opportunity that is growing in front of us, and my sincere thanks go to our German teams for creating such outstanding businesses.” -Niklas Östberg, CEO of Delivery Hero
Company Details (Takeaway•com)
Dutch online food delivery service provider Takeaway•com is a market leader among the online food delivery platforms by serving Europe, Israel and Vietnam. The company currently serves over 36,500 restaurants via its food courier.
- Founded in 1999, headquartered in Amsterdam, Netherlands
- President and CEO: Jitse Groen
- Number of employees: 978
- Market Cap: €3.55bn - EV: €3.07bn
- LTM Revenue: €232.3m - LTM EBITDA: €-25.96m
- LTM EV/Revenue: 13.2x - LTM EV/EBITDA: -118.2x
Company Details (Delivery Hero)
Delivery Hero is a German food delivery service company and a market leader among online food delivery providers in terms of restaurant partnerships, active users and annual food orders. It operates in 41 countries around the world in areas including Europe, Middle East, North Africa, Latin America and Asia.
- Founded in 2011, headquartered in Berlin, Germany
- President and CEO: Niklas Östberg
- Number of employees: 14,631
- Market Cap: €6.62bn - EV: €5.94bn
- LTM Revenue: €637.49m - LTM EBITDA: €-178.9m
- LTM EV/Revenue: 9.3x - LTM EV/EBITDA: -33.2x
Projections and Assumptions
Short term consequences
The acquisition was approved on the 6th of march by the EGM, finalizing the transaction between Takeaway•com and Delivery Hero. The standstill agreement between the two companies allows Delivery Hero to nominate an independent director to the company’s supervisory board with certain restrictions, including not being able to vote on M&A related matters and in case of conflicts of interest. Nevertheless, this right will expire when Delivery Hero holds less than 9.99% shares of Takeaway•com.
The acquisition enables Takeaway•com to enter the market through Delivery Hero's well established brands across Germany, such as Delivery Hero, Foodora and Pizza•de. Delivery Hero has built a large loyal customer base through its aggressive marketing campaigns, capturing approximately 50% of the German whole delivery market. This will enable Takeaway•com to gain the customers from its ex-competitors without changing their behaviour and preferences. Takeaway•com has the ability to leverage from the know-how gathered through the diversification of Delivery Hero’s customer base. Taking a closer look at Pizza•de and Delivery Hero Germany, the two brands were serving two different groups of customers, meaning that if Takeaway•com manages to appeal the low-budget customers and the middle-class families they can cover the majority of the German market.
As Delivery Hero’s German operations cover approximately 50% of the whole delivery market in Germany, with the rest being held by Takeaway•com, the acquisition is a smart move in term of gaining market power. Takeaway•com achieved a Gross Merchandise Volume (GMV) of €471m and revenue of €60m in 2018. Acquiring Delivery Hero is predicted to double its annual number of orders (from 23m to 47m) as well as raise their GMV and revenue to €932m and €136m respectively on a pro forma entity. Overlapping should not become a problem since the brands are not being fully integrated to Takeaway•com brand and continue existing as independent subsidiaries.
Long term upsides
The food delivery market is widely regarded as one where the winner-takes-all. As is explained by Sarah Simon of Berenberg: ‘the number one player will have vastly superior returns and it will be very difficult to break in as a new competitor.” This opinion is in agreement with the CEO and founder of Takeaway•com, Jitse Groen, who underlined this as a key motive for the deal. Being the current number one player in the German market is not particularly lucrative, given that penetration of online food delivery in Germany is among the lowest in Europe, but Groen perceives this as an advantage citing that this offers significant growth opportunities. The €60 million in cost synergies and network effects as well as the combined roster of brands clearly shows the benefits of the deal for Takeaway•com. Furthermore, the acquisition will enable Takeaway•com to acquire additional restaurants from Delivery Hero and its subsidiaries, resulting in an enhancement of the selection of food and growth of the customer base.
This sale is part of Deal Hero’s transition to emerging markets. They plan to sell their operations in Australia, France, Italy and the Netherlands, having already left Switzerland and Brazil, and it signifies their exit from their home market. Therefore, the end to this costly price war between the fierce rivals allows Delivery Hero to free up cash for other avenues, focusing particularly on emerging markets.
Despite the significant growth of online food orders, they make up only a small percentage of total orders. Customers for the online food market are expected to grow at 14% CAGR, and Takeaway•com orders have an expected Year on Year growth of 22% for 2019. The general consensus is that the deal is a win-win for both companies, with Takeaway•com expected to start becoming profitable at the EBITDA level in 2019 and at the net income level in 2020. Delivery Hero is expected to continue its current positive trend.
Risks and Uncertainties
As previously mentioned, the German food delivery market penetration is low. German customers order on average 0.5 meals online per month, compared with one meal in the UK and US, and as many as four in some emerging markets. This raises questions as to whether Takeaway•com will be able to tap into the growth potential that the German food delivery market holds, given that food delivery is not ingrained into German culture.
Takeaway•com faces several challenges in the future with regards to their business model, in addition to the deal. Takeaway•com has been popular with investors due to their asset light-model, inspired by the UK’s Just Eat, providing a platform for customers to connect with restaurants without the costs associated with delivering. However, Just Eat has started to reform their business model by starting their own delivery service due to competition from companies such as Deliveroo. Takeaway•com may have to undertake similar action in the future to tackle these developments, which have previously raised concerns from Just Eat’s investors due to the potential impact of increased costs on profitability. Furthermore, Takeaway•com faces challenges with respect to integrating the different brands (Lieferheld, Pizza•de, and Foodora) that Delivery Hero held in Germany; Takeaway•com previously benefited from having one unified German brand with Lieferando, resulting in more efficient marketing (lower cost per acquisition).
Although competition issues are not expected to be raised from the deal, they still pose an interesting question. The deal will likely create a monopolistic market. However, given that the food delivery market is relatively small in Europe, it would be difficult for regulators to oppose consolidation. The deal may cause apprehension from Germany’s competition regulator, Bundeskartellamt, but it is not large enough to concern European regulators. In the worst case scenario, Takeaway•com may have to sell one of its brands to reduce the combined entity’s market dominance.
“This transaction provides Takeaway•com with a stronger proposition for both consumers and partner restaurants in the German market. It also allows Takeaway•com to operate on a significantly larger scale which is essential in building a profitable online food delivery business. Although the transaction almost doubles Takeaway•com's orders in Germany, there is still ample growth ahead, given that penetration of online food delivery in Germany is amongst the lowest in Europe. We look forward to welcoming Delivery Hero as a shareholder.” – Jitse Groen, CEO and Founder of Takeaway•com
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