(Bloomberg) -- For Delivery Hero SE, the public listing of its Middle Eastern unit brings a much needed cash windfall — and a vexing problem.
On Friday, the German delivery firm set the initial public offering for Talabat in Dubai at the top of its price range, implying a market capitalization of $10.2 billion. That’s within striking distance of the €10.9 billion ($11.5 billion) valuation of the parent company.
It leaves Delivery Hero with the difficult task of maintaining growth at Talabat, where it retains an 80% ownership, while convincing the market that its remaining assets are worth far more.
“I agree that Delivery Hero might look a bit undervalued on a comparable basis,” Niklas Östberg, Delivery Hero’s chief executive officer, said in an interview. “In the end, we’re not focused on what the share price is.”
Investors have punished food delivery companies since growth slowed after rapid expansions during the pandemic.
Europe’s leading providers have had it particularly rough. Delivery Hero shares have declined 74% from highs in January of 2021. Shares of London’s Deliveroo Plc are down 62% since their debut that year. Amsterdam’s Just Eat Takeaway.com NV recently sold Grubhub for about $650 million, a 90% discount from the unit’s pandemic peak.
Östberg cited weak capital markets in Europe as a reason for the trio’s poor performance. “It’s a bit sad to see,” he said. “We’re all valued at a fraction of our US peers.” Earlier this week, Just Eat opted to delist from London, citing low volumes.
Delivery Hero, which operates in more than 70 countries, raised its free cash flow guidance for the year and is now set to generate as much as $2 billion from the Talabat IPO. It could use that cash to pay down its debt, which stands at €5.1 billion ($5.4 billion), or buy other firms.
“The planets are aligning for a revival in M&A in the sector from 2025 onwards,” said Clément Genelot, an analyst at Bryan, Garnier & Co.
Östberg said he is not focused on acquisitions, but the Talabat sale “gives us a little bit more optionality at least to participate in M&A, if there is something that is really good value.” The IPO, set to be the largest in the United Arab Emirates, now has a “strong investor base,” Östberg added.
With Talabat’s success, however, Delivery Hero faces a dilemma that echoes one from Prosus NV, the Dutch e-commerce firm that inherited a large holding in Tencent Holdings Ltd. For years, the Tencent stake had a greater market value than Prosus’s entire business, prompting Prosus to start offloading Tencent shares and buying back its own.
Delivery Hero will sell a 20% stake in Talabat with the IPO. Östberg said his company plans to hold onto its remaining Talabat shares. But he did not rule out buying back his own if necessary.
He said Delivery Hero plans to add categories beyond food, like medicine and beauty products, in more regions. In its core business, however, the company is facing increased pressure from Chinese delivery rival Meituan, which entered Saudi Arabia in September. Bloomberg Intelligence estimates that Meituan’s arrival there could push Talabat to cut commission fees and increase marketing spend, moves that would drastically cut its valuation.
“It’s a little hard to see what incremental value they’d bring more than money,” Östberg said of the rival. “The fight is not gonna be decided on the money, but on the execution.”
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