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Where next for the Just Eat share price as takeover looms?

Just Eat has agreed to a takeover by European peer Takeaway.com. The pair are hungry to combine forces, but the deal isn’t to everyone’s taste.

Just Eat takeover by Takeaway.com: details of the deal

The pair announced they had agreed on an all-stock merger in early August. Just Eat shareholders would receive 0.09744 Takeaway.com shares for each Just Eat share they own. The offer translated to a value of £7.31 per share – a 15% premium - based on Takeaway.com’s share price of €83.55 at the time. At that price, the deal valued Just Eat’s equity at around £5 billion.

Read more on Just Eat shares as Takeaway.com merger is announced

Watch the value of Takeaway.com and the GBP/EUR exchange rate

However, the value of the deal has dropped significantly since being announced. Because it is an all-stock deal, the value changes daily as share prices and exchange rates move. The value is derived from Takeaway.com’s share price, which has fallen almost 13% since the initial valuation was made and is currently trading at €72.80. It is vitally important for Just Eat shareholders to monitor the performance of Takeaway.com shares.

The Just Eat share price will also weigh in. Although the offer represented a premium at the time, Just Eat shares rallied from under £6.36 before the offer was made to £7.80 after it was announced, hitting a high of £8.12. Usually, a company’s share price tends to move toward the implied value of the deal (in this case that would be £7.31), so the fact Just Eat shares have largely traded above that value is significant. This could signal that shareholders believe Just Eat is worth more than Takeaway.com’s offer and are possibly preparing for a higher bid to be tabled by Takeaway.com or another company. Just Eat shares have fallen to a post-bid low of £5.89, but have since recovered and are now trading closer to £7.34.

In addition, the GBP/EUR exchange rate will also have a real effect on the value of the deal as Takeaway.com shares are listed in Amsterdam and priced in euros while Just Eat shares are listed in London and denominated in pounds. The initial valuation of £7.31 per share was based on an exchange rate of €1.114 at the end of business on 26 July. Sterling has been volatile against the euro because of Brexit and, while that has been delayed yet again, the election will inject some added volatility in the coming months.

Read more about the 10 most volatile currency pairs

Will Just Eat shareholders bite at Takeaway.com’s takeover offer?

Takeaway.com shareholders will have to approve the deal at an extraordinary general meeting (EGM) on 4 December for the deal to go through. Offer documents have been sent to Just Eat shareholders, and investors holding a minimum of 75% of the company’s equity must accept the deal for it to become unconditional.

However, there is reason to doubt the deal. The valuation is volatile. Some shareholders have already spoken out against it. Investors have accused one another of sabotage and mischief, and other bidders are circling.

Just Eat rejects takeover bid from Naspers, but it remains on the table

A rival offer for Just Eat has been made but rejected by Just Eat’s board of directors. The offer was made by Prosus, which immediately became the largest consumer tech company in Europe when it was spun off from South Africa’s Naspers and listed in Amsterdam in September, boasting an initial valuation well over $100 billion. Naspers still owns 74% of the business.

Prosus made several offers for Just Eat without success, all of them in cash rather than stock. The first bid was for £6.70 per share and the second was at £7.00. After being rebuffed, the firm decided to go public with its third offer of £7.10 with the hope of enticing shareholders enough to convince Just Eat’s board to change its mind.

Although the offer was less than the implied value of Takeaway.com’s initial offer, Prosus was hoping to capitalise on the significant fall in Takeaway.com shares. It said the fall in Takeaway.com shares meant that deal was worth just £5.94 per share to Just Eat shareholders, meaning its cash offer was worth 20% more than both the Takeaway.com offer and Just Eat’s share price. ‘The Takeaway.com share price has fallen 15% during this period. Against this backdrop, continued market volatility and macroeconomic uncertainty, the Prosus offer provides Just Eat shareholders the certainty of an all-cash offer,’ Prosus said.

Prosus claims the merger of Takeaway.com and Just Eat will not yield the cash and investment needed to stave off competition. The firm claims it is in a much better position to aide Just Eat’s development because it is cash-rich and already has investments in other food delivery companies, including iFood, Delivery Hero and Swiggy. It owns a controlling stake in iFood, which is the market leader in Brazil, a 22.3% stake in Delivery Hero, which is Takeaway.com’s main rival in Europe, and 38.8% of Swiggy in India. Some media reports have suggested Prosus is hoping to bring Just Eat and Delivery Hero closer together.

But Just Eat directors do not see an opportunity with Prosus and were quick to reject the offer outright. ‘The board of Just Eat has considered the terms of the Prosus offer and believes that it significantly undervalues Just Eat and its attractive assets and prospects both on a standalone basis and as part of the proposed recommended all-share combination with Takeaway.com,’ Just Eat said. ‘Accordingly, the board of Just Eat unanimously recommends that shareholders reject the Prosus offer.’

Prosus has sent letters to Just Eat shareholders if they want to accept its unsolicited offer, but Just Eat has urged shareholders to ‘take no action’. Prosus will release interim results on 22 November and investors should look for any commentary on the deal, including the level of acceptances and whether the offer could increase again. Prosus hopes to complete the deal in late 2019 or early 2020 if its deal is backed by shareholders.

Just Eat shareholders have appetite for higher valuation

Although Just Eat has committed to the Takeaway.com offer, its share price has consistently traded at a premium to the offer price since it was announced. This is a signal that Just Eat shareholders believe the company is worth more and that they expect a higher bid to come in. Prosus has already put forward a proposal and said Just Eat would be a ‘perfect fit’ for its portfolio, so it seems right to hold out for a higher valuation.

Frederik Nassauer, investment director at Aberdeen Standard, which owns 4.1% of Just Eat, recently said he expected Takeaway.com to raise its offer in the coming weeks because of the outperformance of Just Eat shares. Eminence Capital, which also owns around a 4% stake in the London-listed company, has said Takeaway.com’s offer is too low and described it as opportunistic. Eminence has said it disapproves of the fact Just Eat shareholders would own just 52% of the new business whilst contributing most of the combined group’s revenues and gross profits in 2020.

Cat Rock accuses Delivery Hero of foul play

The story gets a lot messier. There are a number of companies that hold investments in both Just Eat and Takeaway.com, while some own one of them and an interest in a rival firm. This is muddying the waters and sparking claims of foul play.

The main accusation has been made against Delivery Hero. The company is the second largest investor in Takeaway.com with a 15% stake, having sold its German business to the firm for £930 million in late 2018. In turn, Prosus owns almost 23% of Delivery Hero.

Just Eat's top shareholders' stake

STM Fidecs Trust Co 13.40%
Capital Group of Companies 10.60%
MFS Investment Management 8.70%
Baillie Gifford & Co 5%
Fidelity International 4.20%
Aberdeen Standard Investments 4.10%

Takeaway.com's top shareholders' stake

Gribhold (founder Jitse Groen) 29.60%
Delivery Hero 14.90%
Morgan Stanley 11.60%
Capital Research & Management 10.30%
Cat Rock Capital Management 5.10%
Baillie Gifford & Co 4.75%

Activist investor Cat Rock Capital, a shareholder in both Just Eat and Takeaway.com, has accused Delivery Hero, and in turn Naspers, of manipulating the value of the Takeaway.com-Just Eat deal. It claims Delivery Hero started selling its shares in Takeaway.com at a discount with the intention of putting shares under selling pressure. Cat Rock alleges Delivery Hero began a prolonged fire sale because this lowered the value of Takeaway.com’s takeover bid and made it less enticing for Just Eat shareholders. The theory, according to Cat Rock, is that Delivery Hero did this to undermine the deal so Just Eat shareholders would be more attracted to the rival offer made by Prosus. Cat Rock says Delivery Hero set a limit that allowed Takeaway.com shares to be sold at up to a 13% discount ‘even though prior Takeaway.com placements only had 2%-7% discounts’ and said it acted to ensure the ‘selling would continue for weeks’. Below is one slide in a presentation released by Cat Rock on 24 October.

Delivery Hero has refuted the claims and said the sales were legal, adding it was unaware that Prosus was bidding for Just Eat when it started to sell down its stake. Prosus has agreed with that defence and said it does not ‘control’ Delivery Hero, and therefore is not involved in the company’s decision to sell Takeaway.com shares.

Takeaway.com has argued that Delivery Hero should abstain on the shareholder vote on whether to approve the Just Eat takeover. ‘Delivery Hero’s own market position as well as Prosus’ position as the largest shareholder in Delivery Hero in itself gives rise to a conflict of interest,’ it said. ‘Prosus’ recent announcement of an unsolicited offer for Just Eat with the intention to make both Just Eat and Delivery Hero part of its global food delivery business adds to this.’

What will happen if Just Eat is taken over by Takeaway.com?

There is strong logic behind the proposed merger of Just Eat and Takeaway.com, even if there are concerns over value. Both have carved out formidable leadership positions in key European markets. Both are trying to defend themselves against major competitors. Plus, both are investing in costly delivery services for those restaurants that don’t have their own drivers in an attempt to unnerve those that are traditionally strong in this area, like Deliveroo and Uber Eats.

If the pair merge, the new company will be named Just Eat Takeaway.com. It will be based in Amsterdam but maintain its premium listing in London with a ‘significant part of its operations in the UK’. Combined, the pair handled 355 million orders from 23 countries last year worth in the region of £6.2 billion.

Just Eat vs Takeaway.com

Just Eat first half (H1) 2019 Just Eat H1 2018 Takeaway.com H1 2019 Takeaway.com H1 2018
Active customers 28.6 million 24 million 16.7 million 12.6 million
Orders 127.9 million 104.4 million 71 million 41.7 million
Average order value £18.84 £18.99 €18.83 €19.39
Revenue £464.5 million £358.4 million €179.4 million €105.4 million
Pre-tax profit/(loss) £800,000 £48.1 million (€23 million) (€11.8 million)
Profit or loss per share (0.8 p) 5.5 p (€0.69) (€0.34)
Net operating cashflow £39.2 million £55.5 million (€47.9 million) (€7 million)
Cash and cash equivalents £174.3 million £156.7 million €59.3 million €66.9 million

Source: Company reports

Just Eat and Takeaway.com: a good geographical match

The two companies complement each other and there is little overlap when it comes to geography. Just Eat is the market leader in the UK and, following its acquisition of Hungryhouse, in Canada. Takeaway.com holds top spot in the Netherlands and its purchase of Delivery Hero’s operations means it is also the largest operator in Germany. Both companies have expanded into new markets but are struggling to make money from them at present.

Just Eat also works in Australia, New Zealand, Mexico and Brazil. Its other European operations are in Denmark, France, Ireland, Italy, Norway, Spain and Switzerland. The majority of its operations are profitable, but its newer territories are still in the red.

Just Eat H1 2019 revenue and adjusted earnings

Revenue Adjusted earnings
UK £205.8 million £72.5 million
Canada £133.4 million £900,000
Europe £100 million £13 million
Australia and New Zealand £27.3 million (£2.1 million)
Mexico (£2 million) (£10.3 million)

Meanwhile, Takeaway.com’s other operations are based in Poland, Belgium, Austria, Switzerland, Luxembourg, Portugal, Bulgaria and Romania. However, only its Dutch operations are generating earnings. Its German arm is experiencing double-digit growth, but it is still loss-making.

Takeaway.com H1 2019 revenue and adjusted earnings

Revenue Adjusted earnings
Netherlands €57.9 million €29 million
Germany €82.7 million (€6.7 million)
Other €44 million (€20.5 million)

Just Eat and Takeaway.com: fending off the competition

The food delivery business is very competitive. Deliveroo, Uber, Delivery Hero, GrubHub, Doordash and Postmates are just some of the firms competing for business with Just Eat and Takeaway.com. Many of them managed to avoid meeting their rivals because they operated in different countries, but the competition is heating up as they expand into new territories. Although the food delivery industry is well established, it is still immature and there is a lot of the market that is yet to be penetrated.

Technology and labour can be two of the most expensive items for business and the industry requires both: developing their online platforms and enlarging their fleets of delivery drivers. The geographical fragmentation and the need for cash means consolidation is seen as inevitable: and Just Eat and Takeaway.com want to lead the charge. Together, they would be the second largest food delivery company in the world, trailing only China’s Meituan. The amount spent through the pair last year was greater than the $7.9 billion spent on Uber Eats.

Groen has said the new business will continue to look for other mergers and acquisitions (M&A) opportunities, hoping its size will give it leverage if it decides to target other peers. The two companies have said their home countries of the UK and the Netherlands are ‘two of the world’s largest profit pools in food delivery’.

Just Eat and Takeaway.com: developing a hybrid business model

There are two business models being used by the industry at present. The first is the one used by the likes of Just Eat and Takeaway.com. They offer the online platform that connects restaurants with customers, but the restaurant’s own drivers deliver the food (the platform model). The second is used by the likes of Deliveroo and Uber, which not only provide a platform but also employ the couriers that deliver the food (the delivery model).

There have been two main benefits of the platform model. The first is that costs are much lower: they don’t need to hire swathes of drivers and can remain lean businesses built around tech. The second is that it has also allowed them to expand at a much quicker rate, both domestically and internationally. The delivery model is more costly, boasts lower margins, and has confined companies to busy metropolitan areas where there is enough demand for its couriers. However, the delivery model appeals to restaurants and outlets that don’t have their own drivers and has encouraged many big-name businesses – including McDonald's, KFC and Burger King – to use the likes of Uber Eats or Deliveroo to reach more customers.

There are benefits and drawbacks to both, but these are gradually merging into one model. Those using the platform model, including Just Eat and Takeaway.com, have launched their own delivery services while those favouring the delivery model, including Deliveroo and Uber Eats, have launched a platform-only service that allows restaurants to use their own drivers.

Just Eat and Takeaway.com have only made a tentative entry into the delivery market. Just Eat’s own delivery business only accounted for 1 million of the 128 million orders it took in the first half of 2019, while Takeaway.com’s service, named Scoober, accounts for less than 5% of its total revenue.

Read more on whether a Uber and Deliveroo merger is on the cards, and if Amazon is waiting on the sidelines

These numbers are growing, but the pair are better off building on the strengths of their platform models to avoid sinking money into unprofitable businesses – you only have to compare the financials of the platform model to the delivery model to see that. Many have expected a platform model firm like Just Eat to seek a merger with a delivery model firm like Deliveroo to fully develop what is being called a ‘hybrid model’ – but that would merge a high-margin tech business with a cash-burning, labour-intensive business - and that could be value destroying. Interestingly, Just Eat seems eager to develop its delivery model whereas Takeaway.com is more comfortable building on its platform.

Just Eat Takeaway.com management structure

The combined group would draw on the expertise from both companies. Just Eat’s chairman Mike Evans would hold the same role at the new company while Takeaway.com’s founder Jitse Groen would be the chief executive officer: CEO. Takeaway.com’s chairman Adriaan Nuhn would become vice-chair. Just Eat’s chief financial officer (CFO) Paul Harrison would lead the finances of the new group. Takeaway.com’s chief operating officer (COO) Jorg Gerbig will retain his role at the new company but would share the job with Takeaway.com’s CFO Brent Wissink.

Takeaway.com currently has a two-tier management structure, which it will retain if the takeover of Just Eat goes through. There would be a supervisory board comprised of seven members. This would include Evans and Nuhn, three nominees of Just Eat and two more from Takeaway.com. The second tier is a four-member management board that would comprise of Groen, Wissink, Gerbig and Harrison.

What will happen if Just Eat is taken over by Prosus?

The logic behind Just Eat being consumed by Prosus is there, but it isn’t as clear as the tie-up with Takeaway.com. Prosus is focused on building Just Eat’s delivery model, claiming the ‘significant slowdown’ in order growth in the third quarter of 2019 ‘highlights the need to accelerate investment’. Prosus has rightly claimed that Just Eat ‘considers growing its own delivery proposition an important part of their strategy for the business’, and says this will require substantial investment – ‘in excess of that planned by Just Eat management’.

It has also rightly said that ‘Takeaway.com executives have publicly expressed their lack of conviction in the ability of own-delivery operations to break even in either Continental Europe or the UK.’ Groen has previously said it is ‘highly unlikely’ the delivery model will ‘ever become profitable’ for the industry. What Prosus may be wrong about is the idea that building the delivery model is the best way to add value to Just Eat.

The other sticking point is how Just Eat fits into the other investments Prosus holds. Many understandably think Prosus is trying to become the main consolidator in the sector: buying significant stakes in numerous companies with the hope of benefiting by bashing them together. This is one of the reasons allegations of foul play have been made, with a view that Prosus wants to encourage a tie-up between Just Eat and Delivery Hero further down the line. If Prosus buys Just Eat for $4.9 billion as proposed, it would be nearly double the $2.8 billion it has invested into the sector so far and its first outright takeover to date. Still, those that have received investment from Prosus seemed to have benefited greatly. Delivery Hero’s growth has accelerated and Prosus has already delivered more than a 19% return on its investment.

Where next for Just Eat?

Consolidation has been building over the past couple of years. Many smaller firms have been bought out by those trying to carve out a significant lead in the market and now it is time for the big guys to eye each other up.

Just Eat’s management has made its mind up and has recommended the offer from Takeaway.com, but its shareholders are not yet fully convinced. The volatility of the all-share offer creates uncertainty for shareholders and could see the bid revised in the coming months, but the long-term value behind the deal will remain unaffected.

Prosus is keen not to let Just Eat slip away to Takeaway.com – one of the only major food delivery firms it has not invested in. It believes the London-based company is a perfect fit with its other investments and has tried to offer certainty by making a cash offer that isn’t being tossed up and down by share prices and exchange rates. However, the company’s longer-term plan for Just Eat is unclear, but could lead to some sort of merger with another Prosus investment later on.

Investors should not rule out other bidders emerging. The Prosus bid was prompted by Takeaway.com’s offer, and it could encourage other interested parties to come to the table too. For example, Just Eat and Deliveroo have been touted as potential partners before.

It looks set to be a rocky couple of months for shareholders in the sector. The share prices of both Just Eat and Takeaway.com will remain volatile. Takeaway.com shares will suffer if the deal falls apart, while Just Eat shares could rally if a better offer is made. Prosus is a behemoth of a company, but its share price saw a notable reaction to its bid for Just Eat, so it is worth keeping an eye on that stock too.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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