EDITORIAL: Just Eat failure spells relief for Prosus shareholders
If you were listening closely you might have heard a collective sigh of relief from Prosus's shareholders on Friday as they received confirmation that the company’s R100bn takeover offer had been rejected by Just Eat shareholders.
Remarkably, only just more than 158,000 Just Eat shares were submitted in response to the offer. This suggests the R100bn wasn’t even in the ballpark as far as Just Eat shareholders were concerned. They opted instead for the Takeaway.com share-only deal that allows them to remain shareholders in the combined entity.
Prosus’s overwhelming lack of success for the single most valuable deal it (or Naspers) has yet targeted represents something of a challenge for shareholders. Might they now have to get used to even larger sums being offered for unprofitable businesses? For R100bn, Prosus could have bought Shoprite and Pick n Pay or, if they wanted to stick with technology, bought a large chunk of Naspers’s shares, which continue to trade at a 30% discount to net asset value.
Instead, Prosus’s management followed its strongly held belief that, in the long term, food delivery will be hugely profitable. CEO Bob van Dijk is not discouraged by the fact that no-one is making profit from food delivery (Just Eat’s profit comes from its platform).
When you see a lot of people spend a lot of money, there’s usually something in it. Or collective foolishnessBob van Dijk, Prosus CEO
At Uber Eats, every $2 of revenue is believed to create $3 of cost, says John Colley, a professor of business at Warwick University.
Perhaps appropriately enough for an executive who is under constant pressure to find the “next big thing” and who exists in the shadow of the most successful tech investment yet made (Tencent), Van Dijk is unperturbed by these grim facts. “When you see a lot of people spend a lot of money, there’s usually something in it. Or collective foolishness,” he said about the unrelenting levels of investment into food delivery.
The prospect offered by the Just Eat deal, of creating the world’s largest food delivery business — ahead of major players such as Uber Eats and Deliveroo — was evidently too compelling not to make the £5bn (R93.79bn) offer and then increase it twice to a “full and final” £5.5bn. Just Eat, whose wafer-thin profits have been hit hard by its recent investment in delivery capacity, is the near archetypal unicorn with its most recent results revealing sales up 30% and pretax profit down 98%.
These were the sort of figures that must have helped persuade Prosus’s executives they were on the right track — a rapidly expanding technology-based company in a growing business sector. All that was needed was Prosus’s financial support. The combination would, the enthusiasts believed, eventually guarantee a dominant position in a highly profitable and consolidated food delivery business.
For the cynics, or those who become anxious when eye-wateringly large sums of money are on the table, the offer looked uncomfortably like an enormous gamble. If it was eventually to pay out, Prosus — with Just Eat as part of its food delivery offering — would have had to survive an extremely costly and volatile consolidation process that could drag on for years.
During that time it would have been up against heavyweights such as Uber and Amazon. And then there is the matter of whether market growth would play out as Van Dijk has forecast, which is that food delivery will become an essential part of daily life.
Even assuming two or three players emerge dominant, and that these positions are secure from aspirant players, what are the chances of regulatory interference?
The prospect of attaining the “winner-takes-all” network effect is what drives the likes of Uber, Amazon and Prosus to invest heavily in loss-making businesses. To date, regulators across the globe have allowed technology companies a relatively free hand in this process. The decision by the UK’s Competition and Market Authority to intervene in a proposed transaction between Amazon and Deliveroo suggests the passive regulatory approach can no longer be taken for granted.
It shouldn’t take more than a few years for Prosus shareholders to determine whether they dodged a R100bn bullet or lost out on a never-to-be-seen-again opportunity to secure a place in a hugely profitable business sector.