Uber is buying Postmates in an all-stock deal for $2.65 billion, or about 4.7% of Uber’s market capitalization. Uber will issue 84 million shares at $31.45 apiece.
Uber shares rose as much as 6% to $33 a share Monday, as investors are encouraged by the company’s willingness to double down on investing more in food delivery and slightly less in ride sharing. The latter business is experiencing Covid headwinds, while the food delivery business is seeing a tailwind as consumers stay at home and order food for delivery more often.
Postmates is private and kicked around the idea of going public. Then, Grubhub was acquired by a European food deliver player and Postmates decided to sell.
Uber wanted to acquire Grubhub, which was recently bought instead by JustEat Takeaway, as the food-delivery market is both promising and saturated. "Postmates which is the clear #4 player behind DoorDash, Uber Eats, and Grubhub, would be both a defensive and offensive acquisition in the food delivery space for Uber at a time with its core ridesharing business seeing massive headwinds in this COVID-19 pandemic,” wrote Wedbush Securities analyst Dan Ives. "We see the Postmates deal as the ‘right acquisition at the right time’ as the Street will like this deal for Uber with consolidation rapidly taking over the food delivery space.”
Uber said in its deal statement that Postmates operates in different geographical markets than Uber Eats, making the deal particularly additive to Uber’s business. Postmates also serves smaller restaurants, while Uber works with larger chains.
Also, "For restaurants and merchants, Postmates and Uber Eats will together offer more tools and technology to more easily and cost-effectively connect with a bigger consumer base,” Uber said. "Consumers will benefit from expanded choice across a wider range of restaurants and other merchants. And delivery people will enjoy more opportunities to earn income, with increased batching of orders to make better use of their time.” These comments address market share with consumers as well as delivery-person share.
Ives estimates Uber had been recently running at about 24% market share for food delivery, with Postmates at around 10%, so the combined business could take roughly one-third of the market. And that, of course, is if any technological or scale-related efficiencies do not create a better service that can allow for even higher market share. Estimates from other analysts say Uber Eats has been grabbing about 29% market share, with Postmates at around 7%, still amounting to approximately the same combined market share. Uber Eats’ revenue is expected, according to FactSet consensus estimates, to hit almost $2.5 billion for all of 2020, a number reflecting a take-rate from gross bookings, which is the amount spent on the food by the customer. All figures considered, Postmates’ revenue may have been running at somewhere around $1 billion annually of late. The total food delivery market is expected to grow at a compound annual rate of about 17%, a rate that could accelerate if the stay-at-home environment becomes part of the fabric of consumer behavior. That figure is according to analysts at Morgan Stanley.
For all of 2021, which analysts are expecting will be a rebound-year post-covid, Uber analysts are looking for revenue of about $18 billion, so the deal could add about 5.5% more revenue to the picture on the surface. But one factor to consider: if the deal enables Uber a more threatening position in the market, take rates could rise and the revenue contribution from the deal could be greater than these figures imply.
Uber stock currently trades at roughly 3 times 2021 revenue, a fairly normal valuation for a growth company like Uber, even considering the potential “new normal” type of headwinds for the ride sharing business. Importantly, analysts are still looking for close to 25% growth in ride sharing gross bookings -- the amount the rider pays before Uber’s take rate -- for 2022.
The point: the deal is viewed positively by Wall Street and it carries minimal risk, as no cash was used in the transaction. Existing shareholders in Uber will of course experience dilution and are hoping the strategy plays out.
Watch More Videos From TheStreet and Jim Cramer:
- July 2, 1884: During America's 'Gilded Age,' Congress Passes the Sherman Antitrust Act
- 10 Years Since Tesla's IPO: The Electric Vehicle Maker's Biggest Moments
- Over 100 Years of Hot Dogs: A History of Nathan's Famous
- Coronavirus Update: McDonald's Pauses Dine-In Reopening, Apple Re-Closes 77 Stores
- What Jim Cramer's Watching Ahead of July 4