JUST EAT my hat

8th May '15 by VegPatch

6 comments 4583 reads

A number of politicians will be eating various non dietary items in the aftermath of the UK General Election such as former Lib Dem leader Paddy Ashdown promising to eat his hat if the SNP won so many seats in Scotland. JUST EAT plc seems to have seen this as a signal to eat an Australian / NZ menu aggregator, Menulog.

JUST EAT has announced it will be acquiring Menulog for £445m. Menulog has 5500 signed up restaurants and is the no1 player in this space.

But consider this:

JUST EAT is paying 33x historic REVENUES, 370x historic EBITDA and values each signed up restaurant at £80000. Many restaurants doing takeaway are not actually worth £80k of effectively goodwill, let alone paying £80k for the 10% commission stream that Menulog generates (implying a £800k goodwill value per restaurant). Would you buy your local curry house for £800k, even if it is growing v fast? Each restaurant generated Menulog £2500 of revenue last year. Ultimately as apps get cheaper to build is it not likely that some restaurants build their own App and offer a discount of 5% if you buy through that rather than the 10% given away to the aggregators? Confused.com, owned by Admiral, has struggled to grow its EBIT in the UK in the last 5 years given the competition from the Meerkat, Gocompare and Moneysupermarket. Is this restaurant aggregation market likely to be any less competitive over the longer term?

But it's all ok....because it will be EPS enhancing according to the company.

Phew!

This tastes like a very unpalatable deal to me and I would rather JUST EAT my hat!

VegPatch

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Ramridge

8th May '15

Hi VegPatch -
I agree JE appears to be paying too much for this acquisition, even taking into account significant future growth.
BTW I make the sales multiple to be 33 and not 13.

VegPatch

you are totally right, I was fighting the underground while writing it.
a mere 33x sales

I was staggered when they open up 2%...

sense appears to be prevailing with the shares off c.10% now

The more i think about it the worse I think this deal is.
The Australian takeaway market as quoted by the company is estimated to be £1.6bn in GBP terms
I think this overstates the true size of the market available to JE because it will include players like Dominos Pizza who transact through their own app rather than through aggregators like Menulog (I have checked this on their website and you cant get Dominos). In 2013 Dominos had network sales of c£300m which automatically reduces the market size by 10% on its own. Just Eat on average takes 10% of the transaction value.
So lets say the market size is £1.3bn ex Dominos and this again includes all outlets, whereas many people still just ring up their take away shop directly.
If we said that in the average aggregator market there are typically 4-5 players. In the UK Comparethemarket is the largest with c40% share in 2013 (the most recent data i can find). Assume that Menulog gets a 40% share over time and assume that 100% of consumers use aggregators (totally implausible I know), then it still charges 10% and gets a 40% EBITDA margin = mature EBITDA £1.3bn * 40% share * 10% commission * 40% EBITDA Margin = £21m
So they are still paying 20x mature EBITDA
hmmm think I will eat in tonight

ExpectingValue

Veg,

This was exactly my logic with regard to the total market. Bonkers.

Thanks for the piece

Hi VegPatch -

Without getting into financial details I have a simplistic view. This business has no barriers to entry and companies such as JE are at the land grab stage. So they are paying silly multiples to expand as fast as possible geographically. But it is only a matter of time before it is commoditised and margins, profits, etc and therefore market value will fall as competitors start to eat their lunch (sorry could't resist it...).
I am staying well away.

Ramridge - agreed !

JUST EAT my hat

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VegPatch

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