In a carefully worded letter sent to investors last week, Caledonia said Prosus was getting a bargain. It is hoping the offer prompts a bidding war.
The sector has seen deal after deal since the pandemic shored up the business case as a handful of big players rush to dominate the emerging industry globally. Some bidders have grossly overpaid.
“We think this is a highly attractive acquisition for Prosus, and they have the ability to pay more,” Caledonia’s Will Vicars and Michael Messara told clients, some of whom also have direct stakes in Just Eat.
“We also see plenty of industrial logic for the competitors with global aspirations to make a higher bid for this strategic asset, and the offer terms allow for this to occur. Whilst the bid represents a large premium, we would be disappointed to see the transaction occur at this price, which still represents a significant discount to intrinsic value, and we will seek to garner the best return for our clients.”
Caledonia has owned a stake since Just Eat acquired GrubHub, a New York-listed competitor that was a core investment, in a deal agreed in June 2020. Just Eat remains a top-five position for the firm. Caledonia deliberately stopped short of saying it would reject the bid at €20.30 a share, but it is clearly inviting other potential suitors to take a look and wants its investors to stick around in case a bidding war breaks out.
Rush for positions
Who could bid? Citi analyst Monique Pollard named the most logical three: Uber and DoorDash – both companies were flooded with cheap money during the pandemic and used it to grow quickly – plus China’s Meituan.
You can mount a case for any of the three. All three of their businesses overlap with Just Eat – although are not as strong in the UK, Ireland and those European markets. If a takeover battle breaks out, that’s what it will be about – those territories are the crown jewels.
Just Eat’s best businesses are in the UK and Ireland and Northern Europe.
DoorDash has the least overlap, according to Pollard, although it also owns Wolt, which competes with Just Eat in seven European markets. UberEats, with 13 markets, has the most overlap.
Just Eat made nearly €590 million EBITDA in the UK and Ireland and Northern Europe in the year to December 31. If Prosus was buying just those businesses, it would imply 6.9-times trailing EBITDA. DoorDash, Uber and Meituan are trading at 17.3 times to 40.1 times trailing EBITDA.
The other potential contender is Delivery Hero, which overlaps with Just Eat in Austria, Bulgaria, Italy, Poland and Spain, according to Pollard – but importantly not in the UK or Ireland.
Just Eat wasn’t shopped around – Prosus turned up late last year, the pair went into bilateral talks and signed the transaction. A 63 per cent premium is enough for just about any board to agree a deal.
Prosus has since talked the acquisition up to its own investors. It has said the proposal was the chance to “create a European tech champion” and was attracted to Just Eat’s leading brand positions in European markets.
Pollard didn’t sound too hopeful of a counterbid.
“We believe Meituan’s international expansion strategy will likely be organic and focused first on the MENA region, while Uber appears to have too much geographical overlap to execute a bid that is not rife with regulatory approval risks,” she told clients. “We believe DoorDash is more focused on organic international expansion and investing in new verticals (like grocery).”
The stock last traded at €19.42, below the Prosus bid price.
Caledonia, which declined to comment, obviously sees things differently.
“[Just Eats] has the premier online food delivery franchise for the UK and Northern Europe with market share generally above 50 per cent (and in some markets greater than 80 per cent),” it told clients in last week’s letter. “This transaction, should it be successful, will give Prosus a dominant position in these key global markets.”
Caledonia valued Just Eat at €50 a share on a three-year forward basis, according to its most recent valuation handbook, which would suggest something in the high €30s today.
If there is one thing we know about Caledonia, it is that it doesn’t die wondering. It rides out volatility where necessary, can fall in love with some of its stocks and can be reluctant to sell. It is not a quick flipper.
Some of its biggest positions have been terrible underperformers in recent years, but it is never scared of trying to get a deal moving to make for a better exit or create long-term value. That’s what happened at GrubHub.
The way Caledonia’s investors tell it, the firm saw capital and competition coming into the sector and was keen to vend the business into Uber. Uber made an offer, but was swamped by Just Eat’s $US7.4 billion bid (a shocker for the buyer, with GrubHub sold for only $US650 million in January) and they all rolled into Just Eat.
Now the business is back on the block.
It is worth watching – the food delivery sector has been rife with M&A and flooded with capital. Some of the deals have blown up spectacularly, but Prosus’ bid for Just Eat shows the land grab is still on.