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Just Eat plans merger as delivery push dents margins

The group is mulling a combination with rival Takeaway.com, but its half-year results hint at the cost of its expansion in food delivery
July 31, 2019

Just Eat (JE.) has announced a potential merger with rival Takeaway.com to create “one of the largest online food delivery companies in the world”, as both look to stave off the rising threat from Uber Eats and Deliveroo.

IC TIP: Hold at 762p

Activist investor Cat Rock Capital has been advocating that Just Eat should merge with a “well-run industry peer” since February, arguing that it could make Just Eat “dramatically more formidable as it competes to secure its market position against Uber, Deliveroo and others”. Cat Rock mentioned Takeaway.com and its chief executive, Jitse Groen, by name in a public letter to management.

Cat Rock owns a 2.5 per cent stake in Just Eat and a 4 per cent stake in Takeaway.com. Alex Captain, founder and managing partner of Cat Rock, welcomed the “excellent news” in a statement following the announcement.

Investors in Just Eat have been concerned about the threat posed by Uber Eats and Deliveroo, as the two have rapidly built a position in the UK market. In May, Just Eat’s share price tumbled 8 per cent on the day Deliveroo announced that Amazon (US:AMZN) would lead it in a $575m (£471m) funding round.

Uber Eats and Deliveroo both operate food delivery networks with a heavy focus on technology, while Just Eat has traditionally provided an online marketplace for takeaway food, handling the ordering process, but usually not delivery. It has been moving into delivery, but this has come at great cost. During the first half, investment in delivery pushed pre-tax profits down 98 per cent to £0.8m, while UK margins fell 14 percentage points to 35 per cent.

The deal implies a value of 731p a share for Just Eat, yet despite this the price surged higher than 800p following the announcement, and it was still above 760p by the time the half-year results' announcement was released two days later.

However, despite the optimism, Peel Hunt thinks the synergies from the potential merger could be limited to central costs and best practices, with only limited savings for marketing and delivery, two of the biggest cost items. Just Eat spent £83.8m on marketing in the first half of 2019, equal to four-fifths of last year’s pre-tax profits.