FOCUS: Russia’s Mail.Ru seen strategically wise to buy Delivery Club, but paying high price

By Yekaterina Yezhova

MOSCOW, Nov 14 (PRIME) -- As a proof of its focus on mergers and acquisitions, Russian Internet giant Mail.Ru Group has agreed to acquire big local meal delivery company Delivery Club right after the purchase of mobile games developer Pixonic. Analysts said the new deal could be too expensive for the company, which reported poor July–September figures, but could bring fruit in two to three years.

“While Mail.Ru Group has the lead in the Russian mobile space, the acquisition of Delivery Club further enhances our mobile offering. The food delivery market continues to show steady growth and the combination of our network, resources and expertise with the leading market position of Delivery Club will allow us to take this business to even further success,” Mail.Ru Group Chairman and co-founder Dmitry Grishin said in a statement.

Mail.Ru Group will pay Foodpanda for Delivery Club U.S. $100 million in cash in two parts: $90 million will be paid in November for 90% of the asset and the remaining part in early 2017. The Internet behemoth will fully consolidate the food delivery company and will disclose all results on a pro-forma basis going forward to allow like-for-like comparison.

Berlin-headquartered, Foodpanda is one of the top online food delivery services in the emerging markets of Asia, Middle East and Eastern Europe.

Delivery Club currently has over 4,500 connected restaurants and the number of orders amounts to 20,000 per day. Its net revenue was at 296 million rubles in January–June, and the business was broadly EBITDA neutral, as Mail.Ru Group said in its statement. People use Delivery Club mainly via its mobile application, which brings over 72% of total orders.

Brokerage BCS expects Delivery Club’s revenue to rise to 600 million rubles as of the end of 2016 under conservative estimates, while EBITDA would amount to zero.

The deal seemed too expensive for investment company Aton, which said that the acquisition was the reason behind a 3% fall of Mail.Ru Group stock two days after the news.

Investment company VTB Capital took the deal with a dose of caution, as it believes that justifying the price by potential strong growth and healthier margins along with synergies, might be quite challenging for Mail.Ru Group, even taken Delivery Club’s leading market position into account.

“The acquisition of Delivery Club comes on the heels of a deal to acquire Pixonic. We believe that these acquisitions are aimed at accelerating Mail.Ru’s growth, which has declined to the mid-single digits of late,” VTB Capital said in a research note.

“We look forward to hearing more details from the company on the reasoning behind the deal to acquire Delivery Club, in terms of the growth/profitability outlook and potential synergies to justify the price paid.”

BCS said the deal was a strategically right maneuver. “Delivery Club is an acclaimed leader on the market with a potential volume of 100 billion rubles, chiefly Moscow, and synergy with Mail.Ru Group’s social networks – VK, Odnoklassniki and My World – could speed up revenue growth and cost cuts. We also see some positive potential for Delivery Club, which lost two top managers this summer after a conflict with Foodpanda,” the brokerage said.

Sberbank CIB thinks Mail.Ru Group will promote the service via its social networks and may even integrate it in them. “According to our estimates, Delivery Club may generate around $15 million in revenue in 2016, which implies $125 million in annual turnover, based on an average 12% commission rate. Thus, its market share seems to be around 10%, which suggests a substantial upside,” Sberbank CIB’s analysts said.

Aton also sees several long-term favorable factors. First, Mail.Ru Group will get access to a fast-growing and nascent market of food delivery. Second, there is synergy between Mail.Ru Group and Delivery Club.

“As a result, Delivery Club will become a more welcome partner for restaurants and could raise commission for them, which would push its profit upwards, and the company would be able to generate positive cash flow as compared to zero EBITDA at present. On the whole, significant positive impact from the deal could be noticed in two to three years, in our view, until then investors will find the deal risky and expensive,” Aton’s analysts said.

(65.2167 rubles – U.S. $1)

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