Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Investors appear to have a limitless appetite for online takeaway companies. Delivery Hero Group's planned 4.4 billion-euro ($4.9 billion) initial public offering, at first glance, threatens some indigestion.

The Berlin-based tech group was founded in 2011 to connect customers to takeaway restaurants via the web. As dot-com start-ups go, it's pretty mature. There are 6,000 employees and the company has expanded from Europe to South Korea, Canada and Latin America, often by mopping up other smaller digital intermediaries that also spotted the value of helping takeaways crack online ordering.

For Rocket Internet SE, the digital incubator that owns 35 percent, a successful IPO of Delivery Hero would provide reassurance it can develop companies to being acceptable stock-market propositions.

Low Orbit
Rocket shares has struggled to sustain the excitement around its IPO
Source: Bloomberg

Investors like this sector. Shares in the profitable Just East Plc are up 150 percent since it listed in March 2014, pushing its market value to 4.4 billion pounds. Even loss-making Takeaway.com is up 60 percent since it went public last year.

Appetite For More
Just Eat has performed strongly since its 2014 IPO
Source: Bloomberg

Why would anyone switch into Delivery Hero? The main attraction is exposure to emerging markets, whereas Takeaway.com is mainly in the Netherlands and Germany, and Just East is concentrated in the U.K. A picture is emerging of a handful of big takeaway companies with scale positions in their respective geographies.

Yet for all its adventurous expansion, Delivery Hero is still very much a start-up financially. The company says it made Ebitda losses 116 million euros last year, adjusting for a big acquisition in December. True, the figure was 175 million euros in 2015. But this isn't a company making money on even the most generous measure of profit: the Ebitda loss in the first quarter was 18 million euros.

At the middle of the price range, Delivery Hero would be worth 4.1 billion euros. It expects to have a strong net cash position after IPO, having recently raised 387 million euros from South Africa's Naspers Ltd. Assume it would have a few hundred million euros of net cash, then its enterprise value would be a shade below 4 billion euros -- roughly 11 times 2016 sales, a slight discount to Just Eat's equivalent multiple of 12 times and Takeaway.com's 13.

The relative pricing may look tempting to investors unconcerned with profit metrics. Delivery Hero wants investors to look beyond the losses and focus on an addressable market is claims to be worth 72 billion euros in sales.

Big targets, regular losses and fat valuations validated by market peers. We've been here before. Delivery Hero will require investors to take a leap of faith -- one with which anyone who's ordered a takeaway unseen will be familiar.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net