Why Investors Aren't as Thrilled About a Grubhub-Just Eat Deal

Unlike an Uber-Grubhub deal, a lack of geographic overlap will limit the synergies provided by a Grubhub-Just Eat deal.

For a U.S. food delivery market that has been dealing with intense competition and paper-thin margins, a merger between a leading U.S. player and a leading European player might do only so much to change things.

The Wall Street Journal reported on Wednesday morning that Grubhub  (GRUB) - Get Report was close to inking a deal to merge with European food-delivery firm Just Eat Takeaway, which itself is the product of a recently closed, $7.6 billion merger between rivals Just Eat and Takeaway.com. Not long afterwards, Just Eat confirmed that it’s in advanced talks with Grubhub about an all-stock deal.

Just before the market's close, the WSJ updated its report to note that the Grubhub/Just Eat talks value Grubhub at $70 per share, or a 21% premium to its Tuesday closing price of $57.88. 

Separately, CNBC reported that Uber  (UBER) - Get Report, which last month was reported to have held buyout talks with Grubhub, is likely to abandon those talks in response to antitrust concerns about the companies’ massive combined food-delivery share in some U.S. metro areas. Last week, the cable TV network reported that Grubhub had received buyout interest from both Just Eat and fellow European food-delivery firm Delivery Hero.

Not too surprisingly, given the short-term and long-term financial benefits that could come from buying one of its biggest food-delivery rivals, Uber’s stock has sold off following the reports: It fell 4.8% to $34.83 in Wednesday trading, in spite of a 0.7% Nasdaq gain. 

Just Eat's shares fell 13.1% in London. Grubhub was lower much of the day, but spiked after the WSJ report of a $70 per share deal price. Shares were changing hands around $61 in after-hours trading.

Likely tempering investor enthusiasm towards a Just Eat/Grubhub deal: While a deal could yield some synergies in areas such as administrative overhead, R&D investments and cloud hosting expenses, it likely won’t yield major delivery/logistics cost savings. That's because of the general lack of geographic overlap between Grubhub and Just Eat’s markets and the fact that neither company -- unlike Uber -- operates a ride-hailing business.

In addition, the fact that Grubhub and Just Eat’s biggest markets are generally thousands of miles apart will limit how much the combined company will benefit from having greater network effects, whether in terms of having more diners, restaurants or delivery drivers. This in turn will limit how much the company’s greater scale will enable it to add more diners or restaurants to its platform, as well as how much more negotiating leverage its scale provides it with restaurants (just maybe, the company will have a little more leverage with some big restaurant chains operating on both sides of the Atlantic).

And needless to say, a Grubhub/Just Eat merger will do nothing to reduce the number of major players in a U.S. food delivery market that has been seeing intense price competition and promotional activity from a current count of four (Uber, Grubhub and privately-owned DoorDash and Postmates).

There could still be some consolidation in the absence of an Uber/Grubhub deal. While an Uber/DoorDash deal would be quite unlikely to pass regulatory muster, Uber or DoorDash could probably get approval for an acquisition of Postmates, which has the smallest share of the four major U.S. players and appears to be financially struggling.

But many Uber and Grubhub investors were clearly hoping that the U.S. food-delivery would be consolidated down to two major players, the way that the U.S. ride-hailing market has. And a Just Eat/Grubhub merger would make that scenario pretty unlikely.