Europe's food delivery start-ups are a bit like a souffle that's just been popped in the oven. All you can do is monitor the concoction carefully and wonder how it doesn't collapse.
Some recent deals show things are frothing up. On Thursday, Just Eat Plc, Britain's biggest food-delivery firm, agreed to buy Hungry House, the No. 2, for as much as 240 million pounds ($300 million) in cash. The seller is Germany's Delivery Hero, which is backed by start-up factory Rocket Internet SE.
It's a cheap way for Just Eat to add scale and cut costs. The deal values Hungry House at about 16 times estimated Ebitda, according to Jefferies analysts. That's less than Just Eat's own multiple of 25 times, and in line with U.S. peer GrubHub Inc. Just Eat says the purchase will add as much as 15 million pounds to Ebitda next year. Before the deal, analysts had forecast that would rise 45 percent to 162 million pounds in 2017.
Importantly, the purchase keeps Hungry House out of the hands of another buyer that could hurt Just Eat more: the richly-funded, still closely-held Deliveroo. While Just Eat relies on restaurants to make its deliveries, the latter employs a fleet of cyclists to shuttle from high-end restaurants to customers' front doors. Deliveroo argues its approach is faster and more reliable, but it remains unprofitable. Just Eat's asset-light method is cheaper to run, something that has lured investors to the stock.
For Delivery Hero, quitting the U.K. makes sense. It can now focus on its home market of Germany, where it's in a tough battle with a smaller rival Takeaway.com, which went public in September. The two are waging a promotions and advertising war in a market that has proven more resistant to food delivery: executives there explain that unlike Brits or Americans, Germans aren't sold on paying more for the convenience of home delivery.
Scale is also important: in food delivery, the largest player has tended to make disproportionately more money. Delivery Hero needs have a pitch for its initial public offering next year.
An IPO would also be a relief for Rocket, which last week increased its stake in Delivery Hero. The company is the incubator's most likely IPO prospect right now.
Meanwhile, Just Eat's appetite isn't sated. On Thursday, it also agreed to buy Canada's number two player SkipTheDishes for as much as C$200 million in cash and stock. So far, home-delivery has been less popular there than elsewhere, and it may be tough to make the model work given Canada's low population density and large number of casual dining chains.
So far, shareholders have cheered Just Eat's management. The stock is up 23 percent in London this year, valuing it at 37 times estimated earnings. That looks steep -- it's more than twice Apple Inc.'s multiple -- but it's is only marginally higher than the average for this year, according to Bloomberg data. What's changed is Just Eat's earnings have increased.
As recent arrivals Uber Technologies Inc. and Amazon.com Inc. start competing for the same pool of customers, the risk is that profit comes under pressure. As every chef knows, there's always time for that souffle to fall flat.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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