Online takeaway ordering business Just Eat has just announced the biggest ever deal in the sector - but investors don't like it.
In a regulatory statement, Just Eat announced it is buying Australian and New Zealand rival Menulog for £455 million ($702 million) in a deal fully paid for through selling new shares in Just Eat.
But Just Eat stock is now bombing.
Despite opening higher, Just Eat fell as much as 8.5% and is now down more than 5%.
Traders are likely concerned about what price new shares will be sold at but the big issue is the price of the deal.
Menulog's price tag is pretty hefty given that revenue last year stood at just £13.5 million ($20.83 million), with earnings at £1.2 million ($1.85 million). That means Just Eat is paying an eye-watering 379 times earnings for the business
Just Eat believe Menulog is worth it - they reckon the Australian and New Zealand markets could be worth £1.6 billion ($2.47 billion) eventually, with online takeaway penetration at just 22% at the moment.
Just Eat's finance chief Mike Wroe told Business Insider that Menulog is "one of the most exciting assets out there in the world" and said the valuation was "pretty standard" for the sector. He said: "What you've got to understand is that this is a growth business."
Jonathan Buxton, partner at Cavendish Corporate Finance, said: "What’s driving the deal is global consolidation in the internet intermediaries space, driven by the need to for Just East to quickly build scale and maintain its dominant market share."
Just Eat's big rival is Germany's Delivery Hero, which owns Hungry House in the UK. The pair are engaged in a global landgrab and Delivery Hero just this week spent £380 million ($587 million) on Turkish delivery business Yemeksepeti.com. That was the sector's biggest deal until today.
Buxton said: "Given the hefty price tag though it might take some time for Just Eat to digest and have the appetite for further acquisitions.”
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