A Blog by Jonathan Low


May 13, 2020

What Benefits For Grubhub Are In Uber's Acquisition Offer?

Uber desperately needs to diversify as elusive profitability even in good times has now evaporated.

Despite the exponential increase in food delivery driven by the pandemic, startups are gaining market share by cutting prices. Grubhub could use Uber's superior financial position to help it expand its leadership, especially as restaurants are pushing back on its fees and abusive tactics. JL 

Cara Lombardo reports in the Wall Street Journal:

Travel limitations have devastated Uber’s ride-hailing business, elevating its meal-delivery unit. A combination could help both companies stem losses from the cost-intensive building out of delivery operations and luring customers. The pandemic has added urgency as stay-at-home orders force delivery companies to make investments to keep up. Competition has intensified as newcomers try to grab market share with discounts. And restaurants are pushing back against fees. A combined company would control 55% of the third-party food-delivery market
Uber Technologies Inc. UBER -0.09% is seeking to acquire Grubhub Inc. GRUB -3.84% in a deal that would unite two of the biggest players in the cutthroat meal-delivery business at a time when the coronavirus pandemic has sparked a surge in demand for their services.
Uber, which in addition to its flagship ride business operates a big meal-delivery unit known as Uber Eats, in February approached Grubhub with an all-stock takeover offer and the companies have been in talks since then, people familiar with the matter said.
Grubhub recently proposed that Uber pay 2.15 of its shares for each Grubhub share, which Uber rebuffed as too high, and now the two sides are discussing a lower price, some of the people said.
The talks may not produce a deal.
Should one come to pass, it would reshape the meal-delivery business, a key pillar of the new economy whose prominence has been heightened by the pandemic.
Share-price performanceSource: FactSetAs of May 13, 10:45 a.m. ET
%GrubHubUberTechnologiesMay 12May 13-10010203040
Competition in the nascent industry, which ferries takeout orders from restaurants to homes and businesses, has intensified as newcomers try to grab market share with discounts and promotions. At the same time, restaurants are pushing back against the fees delivery companies charge, squeezing Grubhub and its competitors.
Analysts have long said that the industry—with four major players in the U.S. that also include Postmates Inc. and DoorDash Inc., all of which lose money—is in need of consolidation. Some see room for little more than two major players.
The Wall Street Journal reported in January that Grubhub had tapped financial advisers to consider a possible sale.
Grubhub’s shares closed up more than 29% Tuesday on the news at $60.39, giving the company a market value of $5.6 billion. Uber’s shares rose 2.4% to $32.40, its market capitalization now at $56.2 billion. Uber stock is still down from its IPO price of $45 last year as investors blanch at the company’s copious losses.
A combination could help both companies stem losses from the cost-intensive business of building out delivery operations and luring customers. The pandemic has added urgency as stay-at-home orders stoke demand and force delivery companies to make additional investments to keep up.
Meanwhile, travel limitations and business closures have devastated Uber’s core ride-hailing business, elevating the standing of its meal-delivery unit, which had been struggling to find its footing in a crowded field.
Grubhub, once the industry’s dominant player, had already ceded market share to upstarts such as DoorDash.
Grubhub in October cut its revenue and profit forecasts amid slowing customer growth, sending the shares down 43% the following day and helping prompt the review of strategic alternatives.
The pandemic initially dented Grubhub’s results further as people stocked up on groceries and many in its stronghold, New York City, left town. It has since said sales are starting to rebound.
Both Uber and Grubhub pulled their earnings guidance for the year. Uber earlier this month said it planned to cut 14% of its workforce and has said the move could help it turn a profit in 2021.
A combined company would control an estimated 55% of the third-party food-delivery market, with DoorDash number two at roughly 35%, according to analysts at Wedbush Securities. It would also have the most expansive footprint, combining Grubhub’s strength in large U.S. markets with Uber’s operations around the globe.
“We are always looking at value-enhancing opportunities,” Grubhub said in a statement after the Journal and others reported on the possible deal. “That said, we remain confident in our current strategy and our recent initiatives to support restaurants in this challenging environment.”
Uber said in a statement it is “constantly looking at ways to provide more value to our customers, across all of the businesses we operate” and has shown itself to be disciplined with capital.
Before the pandemic, Uber Eats was focused on a plan outlined by parent-company CEO Dara Khosrowshahi to pull out of markets in which it isn’t one of the top players, including in countries such as Saudi Arabia, Egypt, Honduras and Ukraine.

Eats’ gross bookings surged 52% in the first quarter from a year earlier to $4.68 billion as more people ordered food to their homes. Grubhub’s first-quarter sales were roughly $363 million, up 12% from a year earlier, while its total loss was a worse-than-expected $33.4 million.
Whatever happens between Uber and Grubhub, the industry is clearly in flux. DoorDash and Postmates are each eyeing stock-market listings, possibly this year, and have explored merging with companies that are already public as an alternative.


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