Of course, there are always risks. Let’s dive in.
What We Know
Bloomberg reported, citing a person familiar with the matter, that Uber has approached Grubhub with a takeover offer.
Neither Uber nor Grubhub has confirmed, but Grubhub did put out a statement saying "consolidation could make sense in our industry, and, like any responsible company, we are always looking at value-enhancing opportunities. That said, we remain confident in our current strategy.” That’s after having told TheStreet’s breaking news reporter Tony Owusu that the company had no comment on the news.
Grubhub shares rose 36% on the news, with Uber shares rising as much as 6%.
Grubhub, as of Tuesday, has a market capitalization of about $5.8 billion, next to Uber’s cash pile of $10.8 billion. Uber’s market cap is $58 billion, and even though its net cash -- $5 billion -- leaves it in a tolerable liquidity position in a general sense, many are hoping the deal is in mostly a stock transaction.
Wedbush Securities analyst Dan Ives told TheStreet that Wall Street is hoping to see that this is a stock transaction, as a mostly cash transaction would “make it [a deal] much riskier.”
Why Uber Wants Grubhub
Uber needs to prepare for a new normal, in which ride-sharing adoption slows significantly, in light of social distancing. But food delivery is thriving, and Uber wants to boost its stake in that business, adding to its Uber Eats business, for this safety-first environment.
Uber’s ride-sharing business, which is mostly profitable, is indeed seeing a hugely negative impact from Coronavirus and social distancing, which became concretely evident on the company’s earnings report. But its Uber Eats business grew substantially in the first quarter.
Grubhub’s earnings showed a 12% year-over-year increase in revenue in Q1, driven by higher order volumes than initially expected. Grubhub is in heavy investment mode, but still said it will generate $5 million in EBITDA in Q2. Analysts are expecting 16% revenue growth, as the second quarter encapsulates more of the lockdowns in the country.
Grubhub is expected to see positive EBITDA for the foreseeable future but won't reach profitability after non-cash expenses for several years. And Uber Eats still loses money as well.
So here’s the kicker: not only would Grubhub -- expected to post $1.75 billion in sales in 2021, compared to Uber’s $18.9 billion -- add 10% more revenue to Uber, but the scale advantage could flip Uber into a permanently profitable business.
"This could accelerate profitability by 4 to 6 quarters on the [Uber] Eats piece,” Ives said. "That’s the main thing -- the scale and scope of this would be significant.” Currently, many expect Uber Eats to reach profitability within the next year to year-and-half.
Uber could meaningfully scale down marketing spend and potentially selling, general and administrative, although those cost synergies do remain to be seen. On the top line, Uber could conceivably enjoy pricing power with more market share, price increases that could take the form of higher take rates. Uber Eats take rates are at around 10%, while Grubhub takes about 20% of each sale.
Uber is trading at less than 3 times enterprise value to 2021 sales, not exorbitant for a growth stock. This potential deal could provide significant upside to the valuation.
As for risks, the deal of course isn’t a sure bet, like anything else. But DoorDash could always swoop in for a bid on Grubhub.