Uber to eat up GrubHub: what you need to know
We could be on the verge of seeing UberEats merge with GrubHub to form the biggest food delivery service in the US – but what could the deal look like and how could it impact the wider market?
Is a merger between Uber and GrubHub on the cards?
Several media outlets have reported that Uber approached GrubHub about a possible merger in February following the original article by the Wall Street Journal (WSJ). Neither company has confirmed that talks are underway, but both have suggested a deal could be on the cards.
Upon the release of Uber’s first quarter results, Uber’s chief executive, Dara Khosrowshahi, said the firm was ‘in dialogue with many players’ and that it was ‘having lots of conversations’ about potential acquisition opportunities. Meanwhile, GrubHub claimed that it has ‘consistently said’ that ‘consolidation could make sense in our industry’ but that it is confident in its strategy as a standalone company.
Uber and GrubHub: how much could a deal be worth?
The reports state that the pair are yet to finalise any form of deal or agree on a fair valuation. The speculation alone caused GrubHub shares to spike. On 12 May, when news broke about the possible deal, GrubHub shares started trading at just under $47 but ended the day at over $60, hitting its highest level in 2020 so far.
GrubHub’s current market cap sits at just over $5 billion and is expected to achieve a premium under any deal that is struck, while Uber has $9 billion in unrestricted cash, equivalents and short-term investments. The WSJ suggested GrubHub could earn a valuation of around $6 billion, or around $60 per share, while others have suggested it could be higher with Barclays suggesting it could earn a valuation closer to $7.2 billion at $75 per share.
However, reports suggest that Uber is keen on paying for any deal entirely in shares, meaning it wouldn’t impact its cash position and that shareholders would be given new shares in Uber in lieu of their stake in GrubHub. This is highly likely as, although Uber is flush with cash, it is keen to hold on to as much of its as possible to survive the coronavirus crisis. Uber’s chief executive officer (CEO) said earlier this year that ‘liquidity is key’ in any crisis.
The lack of confirmation implies the pair are yet to agree on a fair valuation and the terms of any all-stock deal. Reports suggest Uber has tried to strike a deal for 1.9 Uber shares for each GrubHub share while GrubHub has asked for 2.15 Uber shares.
Why are Uber and GrubHub considering a merger?
The coronavirus pandemic has caused a problem for Uber. Its core ridesharing business has been severely hit as people stay at home and travel less, but fortunately its smaller food delivery business UberEats has seen a boost in demand as more people order food from home. Gross bookings on UberEats soared 54% in the first quarter (Q1) of 2020.
Read more: Uber’s Q1 earnings unpacked
We have already seen it respond by making a large investment in Lime, which provides bikes and scooters in city centres. Governments are actively encouraging people to travel alone, whether that be using your own car, bike or scooter, and avoid public transport.
The coronavirus crisis has highlighted the importance of Uber’s diversification and in the current environment it makes sense to pool resources around your strongest asset. Lockdown measures will accelerate adoption of food delivery platforms like UberEats and GrubHub over the long term as more people will be encouraged to try them out. Uber will be keen to make its move before the market takes off and GrubHub’s value increases.
For GrubHub, which denied reports it had put itself up for sale in January, the potential opportunity – assuming it is an all-stock deal as reported - lies in gaining a piece of a much larger pie. GrubHub is only active in the US and London, whereas UberEats is available across the world. Plus, it would allow GrubHub shareholders to gain exposure to Uber before ridesharing starts to recover.
UberEats and GrubHub: what would it mean for the US food delivery market?
The competition is much more intense in the food delivery space than ridesharing. Uber has over 70% of the US ridesharing market and only one significant rival in the form of Lyft, according to Statista. But there are four big players in the country’s food delivery market and UberEats is only the third largest in terms of market share with 20%, according to Second Measure, lagging behind DoorDash (42%) and GrubHub (28%), but ahead of Postmates (9%). It is worth noting that Uber claims UberEats holds a larger market share.
Either way, the combination of UberEats and GrubHub would create the largest food delivery company in the US, leapfrogging market leader DoorDash and taking the lion’s share of the market.
Food delivery is a fast-growing market but remains unprofitable. UberEats reported an adjusted loss before interest, tax, depreciation and amortisation of $461 million in 2019 and a further $313 million loss in the first quarter of 2020 alone. GrubHub reported adjusted Ebitda of $186.2 million last year and $21 million in the first quarter – but it remains loss-making at the bottom line.
Having shocked the market last year by stating it may never make a profit, Uber is now reversing on that statement and focusing on becoming profitable, and a combination with GrubHub would make a significant contribution. There are clear cost and revenue synergies on offer that could help improve what are already very slim margins. There is also a growing pushback against the high fees that restaurants are being charged – as high as 30% - and combining forces could be one way of reducing them to appease its partners.
Would a deal pass regulators?
If Uber and GrubHub agree a deal, the biggest threat could be convincing regulators that it’s in the best interest of customers and small restaurants. The deal focuses on the US, and doubts have already been cast. Congressman David Cicilline, the chair of the House Antitrust Subcommittee, has already accused Uber of ‘pandemic profiteering’ and criticised both companies for not looking after their staff and exploiting restaurants.
The national picture could be supportive of a merger. DoorDash has gained a considerable lead and a combination could improve the cost and level of service provided to both consumers and restaurants. But there are fears that it could have a dramatic effect at a local level – it is not the case that DoorDash is the market leader in every state and Postmates is the smallest.
For example, GrubHub has 62% market share in New York and UberEats has 17%. Combined, that would give them 79% of the local market and a huge lead over its rivals. On the other hand, in a state like Houston where GrubHub has just 9% share and UberEats has 27%, a merger would still mean DoorDash is in the lead with 61%. The fear is that one objection at a local level, say from the state of New York, could prevent a deal from being completed or force the pair to make compromises in order to gain approval.
How to trade any potential deal between Uber and GrubHub
News of a potential deal sent the share prices of both companies higher, but both have given back most of the gains as doubts over gaining regulatory clearance emerged. Uber shares were trading at $31 and GrubHub at $47.40 before the news broke, and are now trading at $32.78 and $54.60, respectively.
This suggests there is room for both share prices to go higher if any formal deal is announced, but it also implies that share prices could be exposed to steep falls if the deal trips up on any regulatory or other hurdles. Also, it is fair to expect both shares, particularly GrubHub’s, to return any of the gains they have held on to should they fail to strike a deal.
With IG, you can trade on the world’s best trading platform and back whether you think shares will rise or fall in value. Go long (buy) if you think they will increase in value, or go short (sell) if you think they will decrease in value.
To take a position, follow these simple steps:
- Create an IG trading account or log in to your existing account
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You can also buy and hold US shares with IG’s share dealing service. Right now, there is zero commission when you buy US stocks, including Uber and GrubHub.
Uber and GrubHub: it wouldn’t be the first deal and it won’t be the last
Uber and GrubHub are right when they say the food delivery network is ripe for consolidation, not just in the US but around the world. Uber has backtracked on its strategy to expand and grow at any cost and is now trying to focus on profitability.
This is one of the reasons why the UberEats operation in India was sold off to one of the larger players in the local market, Zomato. As it narrows its geographical focus, it makes sense for Uber to double down on its key market in the US. Uber and DoorDash were thought to have discussed a possible merger in 2019 after mutual shareholder Softbank encouraged talks, but nothing materialised. Meanwhile, part of GrubHub’s expansion has been fuelled by snapping up many smaller players like Eat24 and LevelUp.
We have also seen deals being struck elsewhere. European outfits Just Eat and Takeaway.com recently completed their £6 billion merger to become Just Eat Takeaway. Amazon has also shown interest in the market despite having struggled to make an impact so far after making a significant investment in Deliveroo.
Interestingly, UK regulators approved Amazon’s investment because there has been a ‘deterioration in Deliveroo’s financial position as a result of coronavirus’, and some believe Uber could use the same argument for GrubHub on US regulators.
Read more: Will Deliveroo launch an IPO?
The coronavirus pandemic will clearly accelerate the consolidation within the industry and the current pace suggests it is becoming an ‘eat or be eaten’ scenario. A tie-up between UberEats and GrubHub would create a chasm between the two market leaders and make the smaller players like Postmates highly vulnerable.
There is a chance that DoorDash could look to level up in response by making a bid for the last significant player left in the US market. Similarly in Europe, the merger between Just Eat and Takeaway.com has created a new giant overshadowing other players like Delivery Hero.
The need to scale up and become profitable will be the key driver of consolidation going forward. As Amazon has demonstrated, there is also appetite among other industries that are keen to break into this fast-growing market. One reason for that is that the true potential of courier services is only just starting to be realised.
For example, Deliveroo recently struck a deal to start delivering groceries from supermarket Morrisons, showing that these companies will be key logistical businesses rather than just food delivery companies over the long term.
Companies around the world are struggling to find a way to profitably cope with the increased demand for online shopping and deliveries and tapping into companies with the extensive manpower needed to move goods of all types is one way of getting around that barrier. For now, expect more mergers between existing food delivery players in the market but. In the future, expect bigger players from other industries to make their move.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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