Are Deliveroo and Just Eat shares still acquisition targets?

Talk of a potential takeover failed to deliver much of a jolt to the share price of either Deliveroo or Just Eat Takeaway. With the two stocks trading at low valuations, could this make them more attractive as an acquisition target?

The share prices of both Deliveroo [ROO.L] and Just Eat [JET.L] have seen more than half its value wiped out so far in 2022. With both food delivery stocks trading close to their respective 52-week lows, the companies may be seen to be more attractive takeover bets.

On 11 March, markets blog Betaville published an article detailing rumours that private equity firms and rival Uber [UBER] had expressed interest in buying Just Eat Takeaway, the Dutch parent company of brands such as, Grubhub and the UK’s Just Eat.

The JustEat share price raced 13.2% on the day of the announcement to close at 2,603.5p. However, since then, it has dropped 35% to 1692.6p on 20 May, giving it a year-to-date fall of 56.7%.

Deliveroo has also been eyed up by potential buyers, with reports in the Sunday Times earlier this year that US restaurant delivery company DoorDash was considering it as a takeover target. The two companies met last year to discuss a possible deal, but failed to reach an agreement, and DoorDash instead snapped up Finnish startup Wolt for around $8bn.

The Deliveroo share price rose 4.8% in the week following the news on 6 March, but overall, like Just Eat, its price has not been to investors’ taste. The stock has fallen 55.6% year-to-date to 93p on 20 March — just 16.3% above its 52-week low of 80.02 that it hit during intraday trading on 12 May.

Can Just Eat and Deliveroo maintain order growth?

Just Eat Takeaway’s $7.3bn acquisition of US firm Grubhub in June 2021 has been one of the thorns in its side. The company has faced consistent calls from shareholders such as Cat Rock Capital to sell the division and concentrate on the European market. Earlier this month, TechCrunch reported that Just Eat was considering divestment options for Grubhub.

However, the biggest issue for Just Eat is the slowdown in sales growth as households cut their spending amid rising inflation. In its first quarter results, the company reported total orders of 264.1 million, down 1% from the same period last year. UK and Ireland order numbers remained flat at around 67 million, though gross transaction value was up 4% year-over-year to €7.2bn.

Meanwhile, rival Deliveroo revealed a healthy 18% rise in orders to 82.4 million in its first quarter update. However, average spend per order was down from £23.20 to £21.70, potentially due to households increasingly feeling the pinch.

Takeover chances

A recent report in Seeking Alpha by Robert Vink suggested that Deliveroo’s small global share made it less attractive than its peers as a potential takeover target. He said it had “no leading market position outside of London”, with JustEat snapping at its heels in the capital and Uber Eats the clear market leader in France — Deliveroo’s second biggest market.

“Deliveroo is truly a bet on visionary management and amazing execution — the only way Deliveroo can compete with its better-capitalised competitors,” Vink added. “I believe Deliveroo is adequately valued and reflects the difficult competitive position it currently operates in.”

Uber and even Just Eat could consider a bid for Deliveroo, but any move would face tough competition concerns.

A coming together for Uber and Grubhub in the US could, in theory, extend to a wider bid for Just Eat. The company is aiming for more growth in London, has an undervalued share price and more of an international business than Deliveroo.

“I think that multiple companies may be currently considering a bid on Just Eat Takeaway based on the simple premise — that acquiring this company at even a 100% or 150% premium to current stock prices yields the acquirer significant strategic benefits, underlying profitability and high expected internal rate of returns,” Vink said.

Analysts rate both takeaway stocks a ‘buy’

According to 11 analysts polled by TipRanks, Just Eat Takeaway has a consensus ‘strong buy’ rating and a target price of 4,463.09p, representing a 171.2% upside on its 20 March closing price. Five analysts initiating coverage on Deliveroo stock have a consensus ‘moderate buy’ rating and a 188.25p target price, up 107.8% on Friday’s closing price.

HL Select fund manager Steve Clayton is optimistic about Just Eat, despite the post-pandemic challenges. “The company has promised to refocus on profitability rather than expansion at any price,” he said.

Analysts at Jefferies have a ‘buy’ rating on Deliveroo, which it has previously called the “definitive online food company” backed by a strong logistics arm, its Editions dark kitchens and being a first mover in the grocery delivery space.

“It is on course to thrive in a competitive landscape and generate sustained EBITDA,” says Jefferies analyst Giles Thorne. He added that JustEat’s and Deliveroo’s model are different enough to allow for “profitable coexistence”.

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