Naspers subsidiary Prosus is facing strong headwinds in its audacious bid for the UK food delivery business Just Eat as that company’s board has recommended that shareholders vote against the deal.

This followed Prosus’ publication on Monday November 11th 2019, of its offer document containing the full terms and conditions of its unsolicited bid to acquire the entire issued share capital of Just Eat for 710 pence per share.

The financial terms of the £5-billion offer are unchanged from those contained in Prosus’ announcement of 22 October 2019. It has simply made the offer public and lowered the threshold for shareholder acceptance.

If it succeeds, it will create the world’s biggest food delivery company, overtaking the likes of Uber Eats.

However, the board of the UK-based Just Eat and certain of its shareholders are vehemently opposed to the deal. 

“The Board continues to believe that the Prosus Offer significantly undervalues Just Eat both on a standalone basis and as part of the proposed recommended all-share combination with Takeaway.com. Accordingly, the Board continues to unanimously recommend that shareholders reject the Prosus Offer,” said a statement issued on the London Stock Exchange news service on Monday.

Prosus made its move several weeks after the Just Eat board had agreed to merge with smaller rival Takeaway.com in an all-share deal.

“The Board believes that Just Eat is a leading strategic asset in the food delivery sector and the Prosus Offer fails to appropriately reflect the quality of Just Eat and its attractive assets and prospects, the benefits of first-mover advantage in a consolidating sector, and the significant future upside available to Just Eat shareholders through remaining invested in Just Eat and the Takeaway.com Combination,” the company said.

This deal is a reflection of just how sizzling hot the food delivery space is right now. 

According to market research released earlier in 2019 by Technavio, the global on-demand food delivery service market will grow steadily at a compound annual growth rate (CAGR) of close to 32% by 2021, with just a handful of companies dominating the space. 

In the US, giants like Grubhub and Uber are listed, with competitor Postmates planning a listing.

At the same time, retail giant Amazon and the quirkily named Starship Technologies have introduced self-driving delivery robots, while on the east of the globe, Yandex, the company behind Russia’s biggest search engine, is trialling food-delivery robots which it hopes to integrate with its food delivery platforms.

Meanwhile, those companies in the business of physically delivering food have realised that size counts.

Since its listing in April 2014, Just Eat has made at least 20 acquisitions, mergers or partnership deals and seen its list of restaurant partners climb to 100,000 globally. 

In the UK alone it has delivered over 400 million meals since its launch in 2006.

It’s not just size, but deep pockets that count. Today, leading food delivery companies are collaborating with AI technology companies to deliver food with robots, drones and self-driving cars. 

They are using technology to determine the best and quickest routes to reach customers and are collecting and analysing data including purchasing history, road traffic and market trends to be able to map more food preferences and delivery time.

While Just Eat has a leading position in many of the markets within its footprint, its share price has come under pressure recently. This, says Prosus, reflects weakening operational and financial performance. 

“We believe that the company has not invested enough to adapt to consumer expectations, which has allowed well-funded own-delivery challengers like Deliveroo and Uber Eats to gain market share in Just Eat’s core markets,” says Basil Sgourdos, CFO of Prosus.

The company requires substantial investment in product, technology, marketing and own-delivery capabilities to shift to an own-delivery focused hybrid model (own-delivery and restaurant delivery), protect its market position and capitalise on its long-term opportunity, he believes.

Further, “the financial markets are underestimating the urgency of the requirement for and the scale of this transformation and its likely financial impact on Just Eat.” 

Under the terms of the offer, Just Eat shareholders will receive 710 pence in cash for each Just Eat share, which values the company at £4.9-billion.

This is a premium of about 20% to the closing price of 589 pence per Just Eat share on 21 October 2019 (the last business day before the Prosus offer became public).

It is also a 20% premium to the value of the rival Takeaway.com offer that is on the table. 

At the same time, Prosus has reduced the level of shareholder acceptances required to satisfy the Acceptance Condition to 75%, which brings it in line with the Takeaway.com offer.

Aside from the fact that one offer is all-cash and the other all-share, what the directors and shareholders of Just-Eat will have to decide is which business model they buy into.

Companies in the Prosus stable, including Swiggy in India, Delivery Hero in Europe and iFood in Brazil (in which it has a joint venture with Just Eat) have incorporated delivery into the business model.

The other model, preferred by rival Takeaway.com, does not see food delivery as a value-add. Instead, the restaurant itself takes responsibility for delivery.

“We believe delivery is important. It allows us to reduce time and improve the customer experience,” says Sgourdos. “Fundamentally, we see this as a way to transform how people eat – in time we believe it will be possible to drive the cost of an externally produced meal down to a cost that is similar to producing it at home.” 

Just how profitable food delivery will be remains to be seen. 

“There is definitely technology that can be applied in the manufacture and delivery of food to the consumer, coupled with the convenience of home delivery; however, I am not sure if this creates a profit pool of the size that is currently being touted by these companies,” says Reuben Beelders, CIO at Gryphon Asset Management.

What is becoming apparent is that investors are no longer buying into the “promise” of future profitability from businesses of this nature, he says. So, for example, WeWork has pulled the plug on “scaling” until profits eventually materialise and the share prices of Uber and Lyft indicate caution from investors regarding the ultimate ability to actually generate profits.

This could provide an opportunity for Prosus to pick up these companies at low prices and then invest until they are profitable, without the direct pressure from shareholders.

Whether Just Eat shareholders will buy into this remains to be seen – they need to vote before 11 December 2019. BM