Description

Founded in Berlin in 2011, Delivery Hero is a food and grocery delivery service that claims to hold a market leading position in 56 countries. It went public in 2017 at a valuation of €4.6bn and has a current market cap of around €7.5bn.

With GMV around €12bn, it’s lossmaking as of YE 2023 on a net income and FCF basis and has net debt of circa €3bn.

Whilst the price has already fallen 80%, we believe that the company is due a furtherr significant downward price correction due to the following factors:

1. Overutilization of accounting adjustments and no sign of real profitability
2. A history of failed or struggling investments
3. Regulatory headwinds that could trap Delivery Hero’s cash reserves
4. Questions regarding the company’s liquidity position and cash burn

Delivery Hero is in a highly competitive market

Delivery Hero operates in 87 countries, with a focus on emerging markets. It operates in some tough to manage jurisdictions, including Venezuela and Iraq.

The business is centred around a software platform that aggregates orders and forwards them to restaurants and riders whilst directing cash to local bank accounts.

But beyond that tech stack, which is easily replicable, there are no real assets in the business, which is reliant on slim margins and aggressive marketing.

Last mile logistics are a notoriously competitive business. Since inception firms have battled it out with margin-sapping promotions and rapid-fire M&A to increase market share.

And once won, that hard fought market share is never a given. With low cost of entry, new entrant firms can challenge market-leaders at any time. Consider the example of Chinese delivery firm Meituan. It entered Hong Kong in May 2023. Offering heavy subsidies to customers, it acquired a 37% market share by January. This was almost entirely to Delivery Hero’s detriment, as its subsidiary FoodPanda saw its share of orders in Hong Kong fall from around 70% to around 30% over the same period, according to Bloomberg.

The unending competition has left several market players depleted as they have transitioned from scrappy, growth orientated start-ups to mature PLCs that are expected to make a return to shareholders. Early indications are that several of the firms will not successfully make that change.

We believe that Delivery Hero is one of them.

Shifting targets, accounting adjustments and no sign of profitability

Since going public in 2017, Delivery Hero’s corporate strategy has ridden two horses: pursuing growth whilst making repeated claims that the business would break even.

Months after the IPO, the company promised that it was “committed to grow into EBITDA break-even for the group in 2018 and full-year adjusted EBITDA positive in 2019m”. CEO Niklas Ostberg stressed the targets in an April 2018 earnings call:

 “We want to reiterate here our strong commitment to grow into breakeven in 2018 and full year 2019. We are on plan, and this will not come at cost of the growth. We've continued to invest in all quarters this year. And as a result of our scale and high growth, we will naturally break even at the end of 2018.”

The 2019 annual accounts show that this target was missed by a magnitude of hundreds of millions of Euros, despite Ostberg’s ebullient claims:

Ultimately, Delivery Hero remained adj. EBITDA negative until the close of 2022. It was only in 1H 2023, four years later than promised, that it posted a positive result of €9.2mn. And even then, when the multitude of adjustments were accounted for, the company made a real terms loss of €820.5m.

Adjustments are a key feature of Delivery Hero’s growth-centric accounting, which highlights KPIs and ‘performance metrics’ over profitability, burying the details of adjustments and tweaks in footnotes.

Most recently the company promised that it would generate positive Free Cash Flow in the second half of 2023. It released a trading statement in February for H2, where it said in a ‘Key Highlight’ on the third page that it had broken even on FCF.

Attentive readers will note the small text at the bottom of page 25 stating that “Free Cash Flow excludes interest income and expense”. Previous financial statements show that interest costs Delivery Hero around €80m every six months, indicating that the company is some way from profitability in real terms.

Nevertheless, in its recent trading update Delivery Hero provided a projection that it would cover all maturities via free cash flow until the end of 2028, which would be attained through growth and efficiencies.

In the call it described this projection as a conservative view “far below our long-term ambitions”. If Delivery Hero fails to deliver on this hockey-stick projection or misses targets en route to 2028, it is likely to lose the trust of investors.

Meanwhile, away from the sanitized claims of corporate releases, statements by former employees on Glassdoor suggest the shop floor has a widespread awareness of the difficulties the company faces in becoming profitable.

As well as optimistic projections and adjusted non-GAAP metrics there are other red-flags within the accounts. There have been substantive restatements over the years - in 2021 it declared that it had improperly accounted for the acquisition of Woowa in SE Asia, amending its net result from - €918.1m to - €1002.3m.

On the 25 October 23, as Delivery Hero was approaching its 4Q23 trading update, it was fined €630,000 by BaFin, the German financial regulator, for “failing to disclose inside information”, which it said in a press release announcing the fines, was essential to “to ensure that investors are not misled when making investment decisions”.

Then on the 31^st October Delivery Hero announced its 4Q23 trading update would be released on the 14^th of November. It had previously been scheduled for the 4^th of November; no reason was given for the delay.

The company’s CFO, who retains a management role at a private equity company, announced recently that he was stepping down after a decade at the company, to join payments firm Wise.  

A history of bad investments

Delivery companies have tended to be viewed through the tech prism as growth stocks. However, in the new age of increased interest rates it is perhaps easier to see them for what they really are: good old-fashioned roll-ups.

In their ideal form these companies rely on leverage to acquire smaller firms, expanding their customer bases and finding efficiencies at group level. But the business model is reliant on good execution.

Delivery Hero has a history of poorly performing investments and acquisitions, dipping in and out of markets and business lines, even setting up its own venture capital fund to invest in non-core businesses.

It sold its German business to Just Eat Takeaway in 2018, then in May 2021 announced it would re-enter the Germany through its FoodPanda brand; the venture flopped and was wound down by the end of the year. A jubilant press release announced the sale of a Saudi Arabian unit; however the annual statement indicates it was a forced sale following a dispute with the local business partner. Another Saudi investment in a logistics business was written off, and subsequently became a high earning related party. 

Delivery Hero currently owns and operates its own lossmaking grocery delivery stores under its Dmart label. It also invested $235m in Gorillas one year after the company was founded in 2020, valuing the firm at $3.12bn. It was sold to Getir at the end of 2022 for $1.2bn, a 61% writedown.

The firm’s highest risk acquisition was Glovo, a Spanish delivery firm. Accounts show that the year before it was acquired by Delivery Hero it made a €482m loss.

It had also received qualified audit opinions for failing to provision for a series of lawsuits Glovo was involved in relating to the employment status of its riders, which ran the risk of contravening a supreme court judgment. If the company lost if would have to pay back hundreds of millions in unpaid social security payments and additional fines.

After acquiring Glovo, Delivery Hero placed the provision in its accounts for 400m EUR, and restated 75.6m EUR in its accounts dating back to 2020, when it first acquired a minority stake in Glovo.

Above: Qualified audit of Glovo’s 2020 accounts.

The leadership of Delivery Hero were well aware of these issues – Niklas Ostberg, Delivery Hero’s CEO, was a director of Glovo and signed off the accounts. The Spanish court cases are ongoing, and Delivery Hero is provisioning €30-45m per quarter in case they are lost.

But it is not the only risk linked to Glovo that Delivery Hero faces.

Above: Glovo’s 2021 losses

Anticompetition investigations

Delivery Hero had long been active in Egypt, where it had acquired the market leading Otlob brand. In May 2018 Glovo announced that it would launch its own business in the Middle East with a venture in Cairo. Later that year Delivery Hero announced the acquisition of a minority stake in Glovo.

Despite local media reporting that Glovo’s Egyptian unit had acquired a double digit market share, the company closed the unit. Egyptian regulators intervened, saying that “the behavior in question results in the exit of an efficient and innovative market player that was rapidly growing in the Egyptian market and offering innovative solutions to Egyptian consumers”. Glovo returned to Egypt, placating the regulators.

It would not be the only non-European market where regulators alleged the two companies were operating in concert. In 2019 Chilean politicians accused them of operating a cartel after Glovo left the market in favor of Delivery Hero’s local subsidiaries.

In January 2022 Delivery Hero announced that it would acquire Glovo for a stock and cash deal. Just two days after the merger closed, EU anticompetition regulators announced they had raided the two firm’s head offices. It released an anonymized announcement stating:

The Commission has concerns that the companies concerned may have violated Article 101 of the Treaty on the Functioning of the European Union, which prohibits cartels and restrictive business practices. The Commission officials were accompanied by their counterparts from the relevant national competition authorities.

The investigation concerns an alleged agreement or concerted practice to share national markets for the online ordering and delivery of food, groceries and other consumer goods in the European Union.

From <https://ec.europa.eu/commission/presscorner/detail/en/ip_22_4345>

A couple of weeks after the raids, tech news site Sifted.eu published a story alleging that the leadership of Glovo were cavalier on competition law. A series of former staffers with access to the C-Suite alleged that they had warned Glovo’s leadership to be more careful in this area.

The story also contained a leaked email, in which Glovo founder and CEO Oscar Pierre wrote that his aim was to “dominate” markets by obtaining above 70% market share.

In November 2023 there were further raids on the two firm’s respective headquarters. The EU announced that “"The scope of the investigation, initially including alleged market allocations, has now been extended to cover additional conduct in the form of alleged no-poach agreements and exchanges of commercially sensitive information”.

The addition of a new charge indicates that European regulators are widening their probe. And having never made a prosecution for no-poach agreements were likely to only take the case if they felt confident.

The outcome could be ruinous for the companies as EU regulatory fines often run into the billions. And if the company wants to appeal, it has to post the funds for the fine into a sequestered account. This means that Delivery Hero’s only hope for a soft exit from this situation is to win the case outright, or to make a settlement as quickly as possible.

Concerns about Delivery Hero’s liquidity position

Whilst the growth of the company is undeniable, that has never translated into profitability, leaving it reliant on investor cash and borrowed funds. 

Delivery Hero’s most recent accounts state the company has €1.7bn of liquidity and has projected that its free cash flow – again exclusive of interest – would cover debt maturities until 2028.

Yet despite assurances of liquidity, the company has acting as though it faces a cash crunch.

After Glovo was fined 64m EUR for failure to pay social security in Spain, it pled relief on the grounds that it faced an “extreme situation” and “short term liquidity problems”, with Spanish financial institutions limiting its access to credit and losses of €209m for the 2023 financial year. The court suspended payment of the fine.

The company had also been trying to offload its lossmaking South East Asian businesses without success. Once heralded by Niklas Ostberg as “one of the key growth markets, and thus a key focus region for us”, Delivery Hero had expanded there through an expensive $4bn acquisition of local operator Woowa Brothers that completed in 2021.

Yet shortly before the Q3 results were published a German business news service reported that discussions had started to sell part of the South East Asian businesses.

Delivery Hero even released Q3 figures excluding the lossmaking units on the assumption that they would be sold. However, despite several suitors being floated in the press, no was deal struck. There is a possibility that the food delivery sector is overextended, and firms lack the capital to continue to grow through acquisition. A cheaper strategy would be to allow competitors to collapse organically before acquiring their market share for free.  

And in January Delivery Hero sold its 4.5% holding in Deliveroo for a sharp discount, with a large chunk sold on the open market, garnering £77m for its stake in the British firm. 

All of this raises the question: why would a company with €1.7bn in cash reserves plead poverty over a €64m fine and conduct a firesale of a valuable shareholding?

In its February trading update and call, Delivery Hero’s leadership assured investors that it was not reliant on outside financing. However, it conducted two back-to-back refinancings and added more debt. In the first it extended its term loans and borrowed an additional €500m, of which it pledged to spend €300m repurchasing outstanding convertibles. The second, announced via press release, was a further €250m term loan to the Korean subsidiary.  

The company later announced that it was using €600m to repurchase convertibles that are maturing in 25 and 26, reducing net debt by a total €37.2m. By our calculations the term loans will cost €70m a year, or €350m to maturity in 2029. Clearly the driver here is not de-leveraging but liquidity – Delivery Hero feels the need to push out the debt maturity timeline.

The question is – why would a company that has promised investors it can pay its debts through organic cash generation take this step?

Competition in Korea

Korea represents one of Delivery Hero’s crown jewels: dominant market share and clear profitability. However, the company is challenged by Coupang, Korea’s largest online marketplace.

Coupang offered customers a 10% discount on all their deliveries, nationwide. This resulted in them gaining market share quickly, and in terms of websearches it is challenging the number two operator in the Korean market.

Coupang recently announced that it was introducing free delivery for subscribers to its Wow delivery service. Market watchers incorrectly assumed this meant the end of the 10% deal and that competition in the market would settle.

In fact, competition is likely to intensify, and over time it could well challenge Delivery Hero’s number one spot.

The offer for Wow members is so much more than just free takeout delivery. It’s basically a Korean alternative to Amazon Prime, offering streaming, eCommerce and grocery delivery. It’s the first sign that Coupang is willing to leverage its entire consumer offering and logistics scale to compete in the restaurant delivery market.

Consumers will likely be drawn to this offer, which bundles a host of benefits into one payment. And with deep pockets, Coupang can likely sustain the competition for some time, at least until it builds a significant market share.

We’ve already shown how easily Delivery Hero’s market share was chipped away by Meituan in Hong Kong. It now faces continued competition in one of its best markets, just as it struggles to break even.

Conclusion

A highly leveraged player in a sector exhausted by competition, Delivery Hero faces steep hurdles on its road to profitability. In addition to this it faces regulatory and legal headwinds that could do serious harm to its ability to generate profit and repay its debts.

Catalyst

 Catalysts:

• Glovo losing a regulatory or legal challenge resulting in fines or a change in employment model
• Continued failure to attain profitability
• Inability to refinance debt
• New CFO and a change in accounting practices 

Risks:

• Successful disposal of lossmaking units, bolstering Delivery Hero’s cash position
• Another firm acquiring Delivery Hero. This is unlikely to be a core competitor such as Deliveroo, which is similarly depleted and eschews acquisitions, but could be a new entrant to international markets such as DoorDash.
• Winning the Spanish court cases and the EU probe being dropped

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise may hold a material investment in the issuer's securities, and investment decisions are made at your own risk