Grubhub Has a Lot of Leverage in Its Reported Talks with Uber

Investors are signaling that they'd be happy to see Uber acquire its food-delivery rival for the large premium that it's reportedly asking for.
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Markets seem to have a pretty good understanding of how an Uber/Grubhub merger would be a positive for both Uber  (UBER) - Get Report and the broader food-delivery industry. But Grubhub  (GRUB) - Get Report seems to have a pretty good understanding of it as well, and as a result isn't willing to sell itself cheaply.

According to multiple media reports, Grubhub recently proposed that Uber acquire it for a price of 2.15 Uber shares for each Grubhub share outstanding. Based on Uber’s Tuesday close of $32.40, this would spell a buyout price of $69.66 per share, or $6.4 billion. That in turn is equal to more than a 45% premium relative to where Grubhub traded before the first report about buyout talks arrived on Tuesday morning.

CNBC reported after the bell that Uber has rejected Grubhub’s aforementioned proposal. This has led Uber’s stock to drop (as of the time of this article) 2.3% in after-hours trading to $31.67. Grubhub had dropped 2.6% to $58.80, after rising 29% in regular trading.

To put it another way, Uber has shed about $1.25 billion of its market cap in response to a report that it turned down an offer to buy Grubhub for $6.4 billion. And one has to imagine that the decline would have been larger if the report said that Uber had walked away from talks altogether, rather than simply rejected a particular offer.

Grubhub’s management is probably well-aware of what markets are signaling here. And it’s undoubtedly well-aware of how consolidating a U.S. food-delivery industry that has been collectively generating massive losses amid intense competition and promotional activity among Uber, Grubhub and privately-owned DoorDash and Postmates could do a lot of good for Uber’s income and cash-flow statements.

Potentially adding to the bottom-line benefit that Uber would see: An Uber/Grubhub pairing would (per third-party data) surpass DoorDash as the biggest U.S. food-delivery player, one with a 50%-plus share in markets such as NYC, Chicago and Boston and a decent amount of negotiating leverage with restaurants.

Throw in Grubhub’s substantial (and profitable) takeout-ordering business, the operational cost savings that a merger would yield and the fact that COVID-19 has boosted food-delivery ordering activity, and a deal should at a minimum put a healthy dent into the enormous losses that Uber’s Eats food-delivery unit has been recording.

Moreover, with Uber’s core ride-sharing business having seen demand plummet in the U.S. and many other large markets thanks to COVID-19 -- the company disclosed on its Q1 call that its Rides unit saw business drop 80% annually in April -- Uber now has a greater incentive to take actions that would strengthen its bottom line, as well as find ways to direct more business to its drivers.

It’s possible that regulators wouldn’t be happy about an Uber/Grubhub deal. While a deal’s immediate effect would be to lower the number of notable U.S. food-delivery players to 3, it could be just a matter of time afterwards before the number drops to 2, given that Postmates has a relatively weak hand to play. As a result, if regulators want the industry to have at least 3 major players, it could oppose an Uber/Grubhub deal and instead push for Postmates to be sold.

But should regulators be convinced that an Uber/Grubhub deal is acceptable in light of the losses that the food-delivery industry has been recording, it’s likely a win for Uber even at Grubhub’s reported asking price.

That gives Grubhub, which has a healthy balance sheet and is currently trading about $10 per share below its reported asking price, a strong incentive not to budge from its asking price. And together with how markets have reacted to deal reports, it just might motivate Uber to agree to a deal at that price, or something close to it.