Uber’s Motive Behind a GrubHub Acquisition
Uber is reportedly eyeing a deal for GrubHub, a move that would likely make Uber the U.S. leader in food delivery.
Uber’s motive: Uber Eats has provided the company with much-needed supplemental revenue as ridesharing demand plummets amid the pandemic. The spike in demand for food delivery prompted by COVID-19 can prove to be permanent, and the acquisition of GrubHub would allow the company to benefit from synergies around pricing and corporate overhead, according to Jefferies analyst Brent Thill. Another selling point for Uber is that a deal for GrubHub could potentially accelerate the timetable for Uber’s Eats segment to reach meaningful profitability, according to D.A. Davidson analyst Tom White, who has a BUY rating and $39 price target for Uber.
Big money in the Big Apple: A deal would give Uber greater food delivery access to New York, which Raymond James Analyst Aaron Kessler believes is Uber’s most coveted market. Kessler points out that GrubHub has a 62% market share in NYC, while Uber has a 17% share.
Leverage: More market share could allow Uber to negotiate better terms with restaurant partners.
GrubHub’s lifeline: No product differentiation and a lot of competition make food delivery a difficult business to be in. GrubHub’s stock traded above $140 a share in September of 2018, but decelerating revenue and margin pressure have since crippled shares. GrubHub could use Uber as a lifeline, but D.A. Davidson believes the surge in demand from COVID-19 could “embolden GRUB to hold out for a better price or to remain independent.” The research firm’s analyst Tom Forte, who has an UNDERPERFORM rating and $31 price target on GrubHub, recommends investors do not purchase shares of the food delivery company on the news.
The price: Reports suggest GrubHub is looking for 2.15 shares of Uber for each share of GrubHub, implying a price of about $73, according to Raymond James analyst Aaron Kessler.
Big picture: Further consolidation in the food delivery industry has been largely expected. With GrubHub’s 28% market share and Uber’s 20% market share in March, according to data from Second Measure, a combination of the two companies could put Uber in a position to be the food delivery king.
