The market is giving the stink eye to Just Eat Takeaway.com’s proposed acquisition of Grubhub.
For the last month or so, Grubhub (ticker: GRUB) had been flirting with the sale of the company to Uber Technologies (UBER), which would have created the largest player in the U.S. market, and reduced the number of primary players to three from four, with Uber/Grub leaping ahead of DoorDash, and Postmates trailing behind. It has been the conventional wisdom that the food delivery sector needed consolidation, and an Uber/Grub deal would have accomplished that mission.
But the Just Eat/Grubhub tandem announced Wednesday afternoon does nothing to reduce competition in the U.S. market, and instead potentially provides Grubhub more capital for a price war. Wall Street views the outcome as bad news for Uber, and of questionable wisdom for Just Eat Takeaway.com (TKAYY), an Amsterdam-based company with operations in Europe, Canada, Mexico, Israel, Australia, and New Zealand.
Needham analyst Brad Erickson writes in a research note that Grubhub managed to “snatch defeat from the jaws of victory.”
Erickson writes that “on the one hand, the deal is a clear setback for Uber’s aspirations of driving toward profit in the U.S., [and] on the other hand, the combination doesn’t really change or improve Grubhub’s positioning in the U.S.”
He notes that Grubhub had seen lagging growth rates versus rivals, in particular losing to Uber Eats or DoorDash in New York. Erickson adds that he “struggle[s] to see what Just Eat Takeaway.com brings to the table to help Grub in the U.S. outside of some incremental capital to spend on marketing.”
JMP Securities analyst Ronald Josey agrees that the deal does not materially change the competitive landscape. He sees an Uber counteroffer as possible but unlikely, noting that the two sides were apparently at odds on a potential breakup fee given the potential regulatory hurdles. A merged company would have had half of the U.S. market, and the deal talks had already attracted attention from a group of U.S. senators, who requested investigations from the Justice Department and Federal Trade Commission. That said, Josey contends that an Uber/Grub deal “would have ultimately been approved given industry competitiveness and the lack of profitability industrywide.”
Wedbush analyst Ygal Arounian considers the situation a disappointing outcome for Uber.
“Uber walking away at the altar from the Grubhub deal is a clear negative as competition and pricing pressure will be fierce going forward,” Arounian writes. “Grubhub being acquired by a larger competitor will only embolden the market share battle just at the same time that the regulatory environment around delivery fees across cities is becoming a larger headwind. Grubhub would have fit like a glove for Uber on the key food delivery market, but antitrust potential issues might have gotten in the way.”
MKM Partners analyst Rohit Kulkarni likewise sees Uber as the loser here. “This was a lost opportunity to become a market share leader in the U.S., he writes. “However, we view consolidation in food delivery as inevitable, given pending IPOs for DoorDash and Postmates, and shift in consumer behavior amidst Covid-19. Combined, these aforementioned factors could put all U.S. companies on a faster pathway toward profitability. And, Uber Eats could have a window in growing market share over the next 12 months as [the Grub/Just Eat] merger goes through the digestion process.”
Under terms of the deal, Grub shareholders will get 0.671 of a Just Eat Takeaway share for each of their shares, which implied a price of $75.15 a share at Tuesday’s closing price for Just Eat shares.
Over the last two days, however, Just Eat shares have swooned 16.5%, reducing the value of the deal to $62.75 a share. That is just a hair over the current value of the deal that had been contemplated with Uber, at 1.925 Uber shares per Grubhub share. At current levels, that offer would be worth about $61.75 a share. The slide in Just Eat Takeaway.com shares reduces the total value of the deal to $6.1 billion, from the originally announced $7.3 billion.
In trading Thursday, Grubhub shares were up $2.87, or 4.9%, to $61.92, a slight discount to the current value of the Just Eat acquisition terms. Uber was down 8.1%, to $32. Just Eat Takeaway’s ADRs, which trade in the over-the-counter market, were down 6.1%, to $9.40.
Write to Eric J. Savitz at eric.savitz@barrons.com
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June 12, 2020 at 12:32AM
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Grubhub’s Deal With Just Eat Takeaway Gets Thumbs Down From Wall Street - Barron's
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