A combined Just Eat Takeaway.com NV and Grubhub Inc. will cook up a stronger global meal delivery player and helped spoil Uber Technologies Inc.'s merger aspirations, but just how much heat the new company can deliver remains to be seen, experts say.
Netherlands-based Just Eat Takeaway on June 10 announced plans to combine with U.S.-based Grubhub in an all-stock transaction valued at $7.3 billion. The deal undercut Grubhub's conversations with Uber about a possible merger — though both companies had backed away from a commitment in recent weeks — as well as a potential deal with Delivery Hero SE, which had reportedly also shown interest in Grubhub.
The combination will give Just Eat Takeaway a foothold in the U.S. meal delivery market, currently dominated by just a handful of players including Grubhub, Uber Eats, DoorDash Inc. and Postmates Inc.
"I think the primary benefit we get is extraordinary financial strength and flexibility by being a part of a larger organization where our revenues and our profits are distributed across the globe," Grubhub Founder and CEO Matthew Maloney said during a June 11 call with analysts. "As a stand-alone company in the United States, we're consistently answering the competitive question, and we're consistently responsive to many short-term expectations."
Shares in Grubhub rose 5.1% to $62.05 in midday trading on June 11, while Just Eat Takeaway's Amsterdam shares closed down by 3.8% at €82.24.
Experts have long believed consolidation made sense for the restaurant-delivery business, where profits remain thin even after companies continue to spend vast sums to grab market share. Just Eat Takeaway is itself the product of the merger between European companies Takeaway.com NV and Just Eat PLC.
Meanwhile, the restaurant industry is taking a major hit because of the coronavirus pandemic, which has caused an increase in demand for delivery as more people stay indoors. The rise of delivery commission caps imposed by localities is seen as a risk for third-party delivery companies as restaurateurs complain about the fees cutting into their already tight margins.
The Just Eat Takeaway and Grubhub deal would strengthen the position of the combined company, but experts differed on how much of a competitive advantage it would have over rivals like Uber Eats, the ride-hailing company's food-delivery arm.
"You're talking about, in my opinion, two of the best-in-class operators globally," Tom Forte, a D.A. Davidson & Co. equity analyst, said in an interview before Just Eat Takeaway and Grubhub announced a deal. "They ought to be able to share best practices."
Just eat the competition
Nationally, Grubhub has 23% of the U.S. meal delivery business and Uber Eats has 22%, but both companies trail DoorDash's 45%, according to data analytics company Second Measure. The picture gets more complicated when looking at market shares at the local level. Grubhub has 53% of the meal delivery market in New York City, for example, but just 15% of the market in San Francisco.
It makes sense for Just Eat Takeaway to try to get a foothold in the U.S. market, while the deal could also add to pressure on competitors like Uber Eats, Daniel Kurnos, an analyst with The Benchmark Co., said in an interview before the deal was announced. Once competition eases and companies have enough scale, there are ways to generate profit in the restaurant delivery business, Kurnos said.
Still, it is rare to find examples of successful mergers of U.S. and international companies, especially when it concerns internet companies, because differences across markets make it hard to leverage the benefits gained by combining, Forte said.
"What the e-commerce landscape is like in the U.K. is very different from the e-commerce landscape in the U.S.," Forte said.
The deal also likely will not significantly change Grubhub's operations, Morningstar Senior Equity Analyst Ali Mogharabi said in a June 11 note.
"Nor do we anticipate this deal to improve the firm's competitive positioning in the U.S. market against other players such as Uber or DoorDash," Mogharabi said in the note. "We also do not foresee significant threat to Uber from the newly combined company in the international markets."
Across the meal delivery industry, companies are managing to grow revenue, though profits remain elusive. Grubhub nearly doubled revenue from 2017 to 2019, while Just Eat and Takeway.com were also gaining revenue in recent years prior to their merger. But profits have remained challenged in recent years, fluctuating between positive and negative territory for the industry at large.
A deal between Grubhub and Just Eat Takeaway could also avoid antitrust issues in the U.S. but will turn up the pressure for Uber Eats, according to experts.
Still hungry
An Uber spokesperson said the company had ended its conversations with Grubhub but left open the possibility of future deals.
"Like ridesharing, the food delivery industry will need consolidation in order to reach its full potential for consumers and restaurants," the spokesperson said. "That doesn’t mean we are interested in doing any deal, at any price, with any player."
Grubhub would have "fit like a glove" for Uber, but potential antitrust issues might have gotten in the way, said Dan Ives, a Wedbush Securities analyst in a June 11 note.
Sen. Amy Klobuchar has been a strong opponent of an Uber-Grubhub combination and was among a group of senators who asked federal officials in May to investigate the deal over potential antitrust concerns if it occurred.
"News that the Uber-Grubhub deal may not materialize would be good for both consumers and restaurants," Klobuchar said in a June 10 statement following reports that Uber was backing away from the merger.
Ives, however, said Uber could come back with a competitive bid if pushback on antitrust is cleared up.
"We now see an elevated risk of a price war between Uber Eats and Grub looking ahead as [Just Eat Takeaway] looks to further leverage this linchpin asset and go after market share within the US in Uber's backyard, an uphill battle in our opinion," Ives said.
Uber Eats, which has dragged Uber's finances down in the past, has been buoying the ride-hailing company during the coronavirus pandemic as consumers crank up food delivery.
Uber posted a wider-than-expected loss for the first quarter of 2020 with gross bookings for the Rides business down 5% year over year, but gross bookings for Uber Eats jumped 52% to $4.68 billion. Revenue from the food-delivery business increased 53% year over year to reach $819 million.
Even with the growth, the Eats business is not yet profitable. The food-delivery arm saw an adjusted EBITDA loss of $313 million in the first quarter of 2020.