BREAKINGVIEWS-DoorDash’s Deliveroo swoop is pricey but timely

By Karen Kwok

LONDON, April 28 (Reuters Breakingviews) - Tony Xu has picked a good time to chow down on a rival. The DoorDash DASH.O chief executive has offered to gobble up Deliveroo ROO.L, valuing his British peer at $3 billion after deducting net cash. While the $79 billion U.S. food delivery group's all-cash deal requires more than a morsel of optimism, there’s logic in taking the plunge now.

After a pandemic boom followed by a relative bust as incumbents battled with investors' new preference for food delivery groups that break even, the European sector is consolidating. In February Prosus PRX.AS made a 4.1 billion euro move on Just Eat Takeaway.com TKWY.AS, three months after its target offloaded Grubhub. Given that Prosus intends to soup its new acquisition up with investments to drive growth, the risk is Just Eat’s 21% UK market share - as calculated by Bernstein analysts – waxes and Deliveroo’s 38% wanes.

DoorDash, which has over 60% of the U.S. market but no UK presence, also has a timing advantage. Prosus has a big war chest but is preoccupied with Just Eat, and its other investment Delivery Hero DHER.DE is hampered by a high debt load. Xu’s group faces less regulatory scrutiny than Amazon.com AMZN.O, which holds a 14% stake in Deliveroo, or other players with a meaningful domestic presence like Uber Technologies UBER.N.

All this explains why Xu might be able to get away with offering a premium that’s only 23% above Deliveroo’s closing price on Friday. On the face of it, this constitutes a good deal. It values Deliveroo at 13 times 2025 EBITDA, similar to the multiple Prosus offered for Just Eat. That’s way below the 27 times DoorDash trades on, which reflects its superior growth. At 180 pence a share, it’s also miles below Deliveroo’s 390 pence initial public offering price back in 2021.

Still, it doesn’t mean Xu is guaranteed a chunky return. Assume he can cut 10% of fixed costs, amounting to $60 million on Bernstein estimates. Also assume a 25% tax rate, and $313 million in operating profit by 2028 as per Visible Alpha estimates. DoorDash’s return on invested capital would be around 9%, still below Deliveroo’s 10% cost of capital, per Morningstar estimates. That operating profit is also three years away and over triple Deliveroo’s estimated 2025 figure.

Xu does boast a track record in scaling up European targets. Analysts expect Wolt, acquired by DoorDash in 2022, to increase at a compound annual growth rate of 16% up until 2029. And Deliveroo comes with nine markets including the Middle East as well as the UK and Europe. Yet given a bidding war would make the deal maths more tenuous, Xu is right to choose a time that minimises the risks of there being one.

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CONTEXT NEWS

British meal delivery company Deliveroo said on April 25 it received a cash proposal from U.S. peer DoorDash on April 5 to buy all of its shares for 2.7 billion pounds ($3.6 billion).

Deliveroo announced that its board has reviewed DoorDash’s proposal of 180 pence per share and “would be minded to recommend” it to shareholders, contingent upon agreeing on the other terms of the offer.

DoorDash will need to make a firm offer by May 23.

Deliveroo shares rose 16% to 170 pence as of 0810 GMT on April 28.