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They say the way to a loved one’s heart is through the stomach. For shareholders it is their pockets. In an effort to rekindle old flames, food delivery companies have started serving up profits.
As an appetiser ebitda turned positive for all three of Deliveroo, Delivery Hero and JustEatTakeaway for the first time last year. The main course is expected to be consolidation, followed by some positive free cash flow this year. Takeover talks between DoorDash of the US and the UK’s Deliveroo revealed on Wednesday give a taste of things to come.
Mergers and acquisitions have a chequered history in this sector. Share prices at a fraction today of their pandemic era peaks testify to that even as profits emerge. Consolidation has largely solidified positions within respective operating territories. Gaps in operations mean some small in-country deals may be possible from a competition perspective. But a big takeover needs to be done across borders. And with the current strength of financial markets that gives the US the upper hand.
Given the premium rating for their shares now, US executives cannot ignore acquisitions in Europe, says Giles Thorne of Jefferies. DoorDash shares trade at a 17 times enterprise value multiple of 2025 ebitda compared with 8 times for Deliveroo.
Deliveroo is top of the menu for multiple reasons. It has led the industry strategically with strong positions in high density markets such as London. It was also the first to operate dark kitchens and offer grocery delivery. Moreover, it is expected to finish the year with more than £600mn of cash in the bank, according to Visible Alpha consensus.
Contrast that with JustEatTakeaway, which is cheaper on a 5 times multiple of ebitda but also operationally troubled, with efforts to unload its US business Grubhub hobbled by caps on fees in New York. It has also incurred large writedowns on the Grubhub acquisition that was made at the top of the market in 2021.
DoorDash’s talks with Deliveroo probably fell through over the price. Shares in Deliveroo rose by just a low single-digit percentage on the news, hardly reflective of a typical takeover premium of 30 per cent. However, DoorDash could pay as much as a 20 per cent premium on top of the current share price and the deal should still be free cash flow accretive in 2025, according to Lex calculations. The door for a deal then still remains wide open.