Is Deliveroo an acquisition target?

This content has been produced by Opto and was originally published on the Opto Blog.

Amazon [AMZ] may still be in the running to acquire Deliveroo [ROO.L], suggest analysts since it has the option to buy as much as 50% in the company.

A potential buyer could pay anywhere between 4-6x sales, Ioannis Pontikis, Equity Analyst, Morningstar told Opto. However, the list of suitors is dwindling as acquirers pick other companies in Europe, Pontikis added.

A recent report in the Sunday Times revealed that Deliveroo was eyed up as a takeover target by US food delivery firm DoorDash [DASH] last year.

According to the article, representatives from DoorDash and Deliveroo met last summer to discuss a potential deal, but failed to reach an agreement. The report said that the tie-up would have created a company with $5.2bn in sales.

Instead of Deliveroo, DoorDash bought Finnish food delivery startup Wolt for around $8bn.

Since this news broke on 6 March, the Deliveroo share price has climbed 12.4% to close at 120p on 30 March, suggesting investors may be reignited by the prospect of a future deal. The stock has also been helped by the company's promising full-year results, which showed revenues rose 57% year-over-year to PS1.8m and gross profits were up 43% to PS497m.

Though rising interest rates and an impending cost of living crisis could be potential headwinds for the restaurant delivery segment, the marketplace is still ripe for consolidation. But is Deliveroo a potential target?

Analysts are divided over likelihood of buyout

Deliveroo was flagged as a potential acquisition target last August when German food delivery giant Delivery Hero bought a 5.1% stake in the company's stock, sparking speculation that a takeover could be on the horizon. That led to a surge of 8.6% in the Deliveroo share price.

In a report last year Morningstar added Amazon to the list of possible Deliveroo bidders, and Pontikis reiterated this view. He explained that Amazon already led a $575m investment in Deliveroo, which was approved by the UK Competition and Markets Authority. The company has been green-lit to acquire as much as 50% of Deliveroo without further scrutiny.

"Amazon has already close ties with Deliveroo through a recent partnership in the UK (prime members have free access to the lower tier of the Deliveroo Plus service)," Pontikis said.

Deliveroo stocks plunge

Despite a surge in demand for food delivery since the Covid-19 pandemic, the Deliveroo share price had slumped since listing in London last March, making it potentially ripe for a takeover bid.

The company floated at 390p a share on 31 March 2021 but by the end of its first day had dropped to 287p. Investors were concerned about Deliveroo's failure to make a profit, legal action over its riders' status and its dual-class structure.

It had recovered to 395p by August 2021 but has dropped again since to sit at 120p at the close on 30 March 2022. The main reason for the cratering in its share price was a European Commission proposal that companies like Deliveroo would have to reclassify their drivers and couriers as full employees rather than independent workers. This would mean extra costs for a group still struggling to make a profit.

The stock was also impacted by the ending of lockdown restrictions in the UK, enabling consumers to return to in-person dining.

What does the future hold?

Although Deliveroo reported positive full-year figures for 2021, ongoing headwinds could further impact its profits and, in turn, its position as a takeover target.

At the end of last year, the company's gross profit margin of 7.5% was down from 8.7% in 2020. This was due, it said, to accelerated investment in customer acquisition and retention to "support future growth, as well as the reversal of benefits from higher basket sizes during Covid-related lockdowns".

Deliveroo's adjusted EBITDA was a loss of PS131m, compared with a loss of PS11m in 2020, as a result of increased marketing and technology spend.

AJ Bell investment director Russ Mould was cautious of potential challenges ahead. "It is battling hard in the cut-throat takeaway market," he said. On one hand is the company's ambition and scale advantage; on the other are rising living costs and reopening of economies, Mould explained.

However, analysts still seem generally optimistic. According to six analysts polled by MarketBeat, Deliveroo stock has a consensus 'buy' rating and an average target price of 276.83p, an upside of 130.7% on its 30 March closing price.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.