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Just Eat shares climb 25% on merger announcement. Here’s what I’d do

Just Eat (LSE: JE) revealed on Saturday it was in talks concerning a possible merger with of the Netherlands, saying: “A further announcement will be made if and when appropriate.

That further announcement didn’t take long, as the takeaway food delivery company told us Monday of “an agreement in principle on the key terms of a possible all-share combination of Just Eat and”

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The agreement would see existing Just Eat shareholders owning 52.2% of the new combined company, which looks set to be valued at around £10bn, with a combined £6.6bn in orders in 2018. Headquarters would be in Amsterdam, but a London listing would be retained.

Just Eat shares gained a quick 25% in early trading, reaching 797p, their highest valuation of 2019 so far. 

What to do?

The question now is, do you want to be a part of the booming takeaway food business and buy in? I’m cautious, because I reckon it might not be as good as it looks. Just Eat shares reached a peak of 906p in February 2018, some way ahead of Monday’s spike. But since then they had shed 30% of that value by market close on Friday.

Some of the decline will have been due to competition fears following Uber‘s failed attempt to buy out UK rival Deliveroo in late 2018. That has since been intensified by a major investment by Amazon in Deliveroo, apparently after a couple of failed attempts to buy it outright.

Romance over?

I suspect there’s also an element of investors getting a bit bored with the latest new growth idea, as so often happens, and I think we may well be heading for a period of more modest valuations for food delivery companies. Just Eat shares, for example, have been on very high P/E valuations, which reached 75 by the end of 2015.

A trebling of the share price over the past five years does seem to have justified the early optimism, providing a very nice reward for investors despite more recent weakness. And forecasts suggest Just Eat’s P/E would have dropped to around 35 by the end of 2020.

That would still have been quite a heady growth rating, and it would have needed a 2.5-fold multiplication in earnings per share to bring it down close to the FTSE 100‘s long-term average of around 14. Seeing how the takeaway food delivery business has grown so strongly over the past few years, I don’t discount that possibility — though I do see significant risk.

Snap them up?

What would I do now? Last week, before the latest news broke, I would have gone along with my colleague Roland Head’s take on it. A time when a growing business sector has seen share prices peak and then fall back, and is experiencing increasing competition and softening margins isn’t, in my view, the time to start investing in that business.

On today’s elevated price I see the risk of disappointment. High-flying (high-risk) growth shares aren’t for me at the best of times. If I held Just Eat shares, I’d be selling them now and pocketing my 25% bonus.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Uber Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.