Why selling my Menulog stake was like selling Instagram to Facebook

Earlier this month at a Goldman Sachs technology conference in Hong Kong, some of Asia’s best founders and VCs met to talk about the burgeoning Asian technology sector. One venture capitalist was recalling how when Instagram was sold in 2012 (to Facebook) for US$1 billion it was, at the time, a record trade exit for a social media business. However, a partner at a leading Silicon Valley VC firm, who had been a shareholder in Instagram, would later observe that selling for US$1 billion was the biggest mistake they ever made – Instagram is now believed to be worth more than US$30 billion (around 10 percent of Facebook’s current market value).

AussieCommerce founder Adam Schwab: happy to admit he probably sold his Menulog stake cheaply.

A few weeks ago, online food ordering business Menulog was sold to UK-based giant Just Eat for $855 million (disclosure: I was a very small, passive shareholder in the business). Almost all reports on the sale have noted that it was a very high price – a bit like what people said about Instagram. (At the time of its sale, Instagram had only 14 employees and no revenue).

Most commentators noted that Menulog was sold on a price earnings multiple of 371 (the average P/E multiple for ASX listed companies is under 20 times earnings), giving the underlying impression that the purchase price was too high.

However, looks can be deceiving.

A few months before it was sold, Menulog merged with EatNow and was already extracting very significant synergies. The price earnings multiple of the Menulog business would have fallen significantly as earnings dramatically increased. Plus, Just Eat will be able to use its technology platforms and expertise to further refine the business. Meanwhile, commissions charged in Australia (of around 10 percent) are far less than those charged in the United States and Europe, while market penetration in Australia is around a quarter of that of Europe. It’s entirely possible that the business could make upwards of $100 million in the coming years, which makes Just Eat’s purchase price look more like Instagram and AOL.

Because no one from Menulog or JustEat were willing to disclose much on the record, journalists obtained commentary from the CEO of Delivery Hero – Clive Thorpe, who happens to be a (far smaller) competitor of Menulog. Thorpe claimed that the price paid was “an insane amount of money. I really think even $500 million would have been too much.” Thorpe based his views on the purchase price that Delivery Hero itself paid for Middle Eastern-based Yemeksepeti. The problem with Thorpe’s reasoning is that Yemeksepeti is growing at 60 percent a year, while Menulog is growing at around double that rate. As any first year finance student would attest – the value of a business is dependent on its return on equity and how quickly the business is growing.

Critically, Menulog was one of the few remaining online marketplaces in Australia. Seek, REA, CarSales as well as Booking.com and Expedia dominate virtually all others. Marketplaces benefit from network effects – as the number of sellers increase, so too does the number of buyers, increasing the value of the marketplace to all participants. Menulog has a dominant position in a marketplace which is growing at an incredibly fast rate while providing a valuable service to restaurants and diners. (It’s far easier to make a booking on an app or website than having to call up and explain over the phone, plus restaurants only pay a small percentage of sales which they can choose to accept or not, so it’s virtually risk free marketing). Because Menulog already has the vast majority of Australian restaurants and is the dominant platform, it makes sense for users and restaurants to continue to use it (as opposed to the far smaller Delivery Hero).

The market apparently agrees it was a good deal for Just Eat, with its share price trading only slightly below its all time high (valuing the business at AUD$6 billion, more than double its float price a year ago).

Adam Schwab is the founder and CEO of the AussieCommerce Group, the fastest growing business in 2013 according to BRW and the owner of www.LuxuryEscapes.com, brandsExclusive, TheHome and Living Social.

Source: BRW, Adam Schwab, June 16^th 2015