Ever since it emerged that Berlin-based online food delivery group Delivery Hero had acquired 5% of the Deliveroo (LSE: ROO) share price, speculation has been growing that the European company will launch a takeover for its UK peer.
The German company has repeatedly said that it is not considering making an offer for its British rival. And I do not have any evidence to prove the opposite. Nevertheless, I believe that in the long term, a buyout could be on the cards for Deliveroo.
An offer for the Deliveroo share price
The economics of the food delivery industry is enough to convince me that a merger could happen cards at some point in the future. This industry is incredibly competitive. Deliveroo is having to fight for market share all the time, and so are its competitors. As a result, few of these companies make money. Any cash they do earn goes straight back into attracting customers.
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This is the reason why there have already been some significant combinations in the sector.
At the beginning of 2020, food delivery firm Takeaway.com agreed to buy Just Eat for £5.9n after a protracted takeover battle with Naspers’ international dealmaking unit, Prosus. It then went on to buy Grubhub.
But even after these deals, the enlarged Just Eat Takeaway is facing criticism to explore a merger with other companies such as DoorDash and Delivery Hero.
Deliveroo is already backed by Amazon, which could be a potential acquirer. The tech group’s deep pockets would help fight off the likes of Just Eat and Uber Eats. In November of last year, the latter acquired US-based Postmates in a $2.7bn deal to consolidate its grip on the sector.
These deals were all agreed with one aim in mind, scale. The bigger these companies become, the more efficient they can become. They can also remove the competition from the market.
If the company does not go on the offensive, it could be left behind by larger, more aggressive peers. That would undoubtedly have a negative impact on the Deliveroo share price. If the stock drops substantially, it may face pressure from major investors to put itself up for sale.
Buy, sell, or hold
While I believe the endgame for the company will be an acquisition, I am not going to invest based on this speculation alone. There is no guarantee an offer will ever emerge, and even if it does, there is no guarantee the bid will be above the current share price.
As such, I need to consider the company’s underlying fundamentals as well. On this front, it is moving forward. Order volumes are growing, and customers are returning. Nevertheless, profit remains out of reach.
With this being the case, I would buy the stock as a speculative investment. I think the company is heading in the right direction, with sales and order volumes growing. Still, I also believe the Deliveroo share price will remain under pressure until the firm can produce a consistent profit.
