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Prosus aims to become top global food delivery player with Just Eat buyout offer

23 October 2019

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by Mike Gresty, Senior Analyst - Naspers

Prosus, which includes all of Naspers’ internet interests outside of South Africa (SA) including a 31% stake in Tencent and investments in mail.ru, OLX, Avito, letgo, PayU etc., listed on the Euronext Stock Exchange in Amsterdam on 11 September. On Tuesday (22 October), Prosus announced that it has held talks to acquire UK-listed food delivery platform, Just Eat, but that it has not managed to reach an agreement with the company on the terms of the deal, so it has gone directly to shareholders. Prosus is offering GBp710/share, all in cash – a 20% premium to where Just Eat closed on Monday (21 October) and a 20% premium to the current bid from Takeaway.com.

In August, Takeaway.com made an offer to merge with Just Eat in an all-share deal. Since the offer was announced, Takeaway’s share price is down >15%, so it would appear to us that Prosus is capitalising on the drop in the value of Takeaway.com since its offer was made. Since Prosus has not received the support of the Just Eat board, it is going directly to shareholders and pushing its offer based on giving Just Eat shareholders greater certainty. This would be a material deal for Prosus and is consistent with management’s stated goal of growing its core, non-Tencent businesses.

Following Tuesday’s conference call with Prosus management discussing the offer made for Just Eat, we highlight the main points of interest that came out of the call below:

  • If successful, the deal will create the largest food delivery business in the world. On the call, Naspers CEO Bob van Dijk pointed out that there is virtually zero overlap with Prosus’ other food delivery businesses. The UK and Canada were highlighted to be the key markets for Just Eat in its 13-country portfolio. Prosus and Just Eat jointly own iFood in Brazil.
  • Prosus believes that Just Eat needs to increase investment if it is to defend and grow its position. Management thinks the slowdown in its latest UK results is a consequence of Just Eat’s lack of adequate investment. Prosus wants to acquire the whole business and delist it because it believes the necessary investment over the next few years is best done in a private environment. In our view, we can safely assume that Just Eat would go from a profitable position currently to loss-making again (or very marginal perhaps) in the short term.
  • Prosus thinks that Takeaway.com is less enthusiastic about the “1P/own delivery” model than Prosus. We believe this relates to the strategic debate around whether to remain merely a marketplace that puts restaurants and customers together vs a vertically integrated player which includes owning the logistics to do deliveries and make food in “cloud kitchens”. Although Prosus is promoting itself as having superior capabilities in implementing the vertically integrated model, we note that some investors on the call were not convinced.
  • There were a number of queries from investors on the call regarding Delivery Hero (in which Naspers has a 22% stake) selling down its stake in Takeaway.com. Delivery Hero’s stake in Takeaway.com originated from a disposal of its German business to Takeaway.com in return for shares in late 2018. Delivery Hero’s selling, some investors argue, is why Takeaway’s share price has been under pressure recently. The question then arises as to whether Delivery Hero was in fact acting in concert with Prosus on this? It was pointed out that the offer Prosus is making is slightly lower than what was implied in Takeaway’s initial share-based merger offer. Nevertheless, this is clearly an area of sensitivity and van Dijk argued that Delivery Hero is entirely independent and there was no collusion. He believes that the fall in the share price is related to a decline in Internet stocks broadly and not because of pressure from Delivery Hero selling.
  • Prosus sees Food Delivery, Fintech and Online Classifieds (the three main verticals in which it is investing most actively) as each having the potential to be $20bn businesses in the future. To put this in context, Prosus currently has a $120bn market capitalisation, which is a ~20% discount to the net asset value of $150bn. At present, 85% of Prosus’ net asset value comprises of its investment in Tencent. That should give investors some idea of the vision behind the Prosus move.
  • This is a GBP4.9bn ($6.4bn or c. R93bn) deal. Prosus has $6bn of net cash at present. According to management, it has a fully funded 5-year business plan which would not be altered by this deal. It has secured a GBP2bn funding line from JP Morgan to fund the buyout. This is bridging finance that it could refinance as markets permit. It expects the deal to be concluded one way or the other by the end of this year or early 2020.
  • Prosus intends to keep the management team of Just Eat in place. It hopes that the Just Eat board would come around to the strategic merit of its proposal. However, it was acknowledged that Just Eat’s board has already come out and rejected the bid.

If successful, this deal would equate to about 5% of the Group and would be, by a considerable margin, the largest deal Prosus will have done to date from an acquisition perspective. Our initial impression is that this combination would make good sense for Prosus. It has superior financial firepower to other food delivery platforms, so it is hard to see any of these companies being able to outbid Prosus on a cash basis. It is difficult to say whether there could be a bid from an entirely left field source. In our view, there is still a lot of water to flow under the bridge though, especially with so many questions around Delivery Hero possibly pushing the Takeaway.com share price down. It is therefore far from certain that Prosus will get the 90% support it is seeking to acquire the business and delist it. The fact that Just Eat’s share price was trading at GBp730/ share after the deal was announced also implies the market anticipates that Prosus may have to raise its offer if it is to succeed. With Prosus stressing the point that its all-cash offer gives Just Eat shareholders certainty, it could be that the attractiveness of this deal is dependent on how tech prices perform over the remainder of this year.

 

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