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Fri 8th May 2015 - Just Eat acquisition and Enterpise strategic review
Just Eat lines up £445m Australian acquisition: Just Eat, the leading online and mobile marketplace for takeaway food, is to acquire Menulog Group for £445 million to be financed from the proceeds of an issue of new equity. Menulog is the market leader in the Australian and New Zealand online takeaway marketplace. It has a selection of more than 5,500 unique restaurants and 1.4 million active consumers. Menulog has seen rapid growth in order volume with the business achieving year-on-year order volume growth of 96% for the three months ended 31 March 2015. Just Eat believes there is a ‘compelling rationale’ for the acquisition of Menulog which will allow it to acquire a market leader in a market of significant scale. The Australian and New Zealand takeaway delivery market size is estimated at circa £1.6 billion, with online penetration rate estimated at circa 22%. The Australian and New Zealand markets are structurally very similar to that in the UK and are therefore markets in which aggregators should thrive. These markets have a strong takeaway food culture, a fragmented restaurant market, high levels of disposable income and a high level of ecommerce adoption. Menulog is the market leader in the Australian and New Zealand online takeaway marketplace. The transaction adds another two markets to those where Just Eat has the #1 market leadership position. Menulog has a broadly similar business model to Just Eat with an average commission rate of 9.8% for the twelve months ended 31 March 2015. Menulog generated 6.3 million orders for the twelve months ended 31 March 2015. In the three months ended 31 March 2015, orders were over 1.8 million, growing 96% year-on-year. Menulog generated £13.5 million of revenues and £1.2 million of Ebitda during the twelve months ended 31 March 2015 and is growing rapidly, with 96% year-on-year order growth for the three months ended 31 March 2015. The deal creates a group with over 67 million orders per annum and growing rapidly. Just Eat chief executive David Buttress said: “Since the time of our IPO last year, we have consistently stated that participating in a disciplined manner in industry consolidation was an important strategic objective for JUST EAT. The acquisition of Menulog, a business with strong leadership in an attractive and fast-growing market, is fully consistent with this approach and will be an important addition to the JUST EAT business. The Menulog founders have together built a great business and I look forward to working closely with Menulog’s CEO and his experienced management team in the coming months.” An equity fundraising is expected to be launched in mid to late May, following receipt of the approval of the Acquisition by the Foreign Investment Review Board in Australia. Completion of the equity fundraising is expected early to mid June 2015.

Douglas Jack – we expect a transformational Enterprise Inns business review: Numis Securities leisure analyst Douglas Jack, issuing an ‘Add’ recommendation and a 150p share price target, has forecast a transformational strategic review when Enterprise Inns (ETI) reports First Half results next Tuesday. He said: “We forecast profit before tax being up 5% to £57m, based on 0.2% LFL net income growth and 4% net interest/debt reduction. More importantly, the announcement should include the results of a strategic review, which should help to allay fears relating to the forthcoming Statutory Code and Market Rent Only (MRO) option. We are raising our target price to 150p, from 125p. LFL net income rose 0.3% in Q1, a level which we broadly expect to have been maintained in Q2. After all, wet-led pub market beer/cider sales growth remained at +0.8% in the year to March (vs +0.8% in the year to December), against a backdrop of a 5.6% annual decline in supply as at March, a similar pace as at December (-5.5%), according to CGA Peach. The strategic review should aim to mitigate the impact of the MRO. There are three questions that need be addressed, but their outcome cannot be known fully until the MRO starts to be implemented, after May 2016. How many pubs will go free-of tie? The MRO should only apply to leased pubs (60% of ETI’s estate), but with 10% (the pubs most likely to have gone free-of-tie) possibly converting to managed. Typically, only 20% of lessees choose high rent/low beer price agreements, implying 10% of the remaining estate considering going free-of-tie, of which many should chose free-of-tie pricing, in order to retain the pub company’s business and capex support. Impact? Every 10% of the estate that converts to free-of-tie represents circa 100,000 barrels lost at a cost of £190/barrel (£58 mark-up; £132 Enterprise’s incremental buying power). Thus, 10% of the estate equates to a £19m impact, declining by £1m pa due to: ETI’s mark-up declining by £5/barrel pa; and ETI’s number of pubs declining by 4% pa. We expect any impact from free-of-tie pricing transfers to be minor. Offsetting actions. We estimate that at least one-third of drink income lost to the MRO would be recouped through higher rent. Otherwise, ETI could mitigate the impact of the MRO by withdrawing business and capex support from free-of-tie pubs, and redirecting capex into its managed estate, targeting higher returns. It could also consider forming a REIT for the free-of-tie, commercial lease estate.”

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