Uber Is Ready to Acquire Grubhub

Written by Jennifer Clark
Posted May 20, 2020

Uber Technologies (NYSE: UBER) is trying to make its business viable, grasping at what works and letting go of what doesn’t. Along with many other businesses, Uber has had to redirect its focus to other aspects of its business because of the coronavirus. Thanks to state lockdowns and fewer people using Uber’s ridesharing app, the company needed to focus on something that would bring in revenue during the pandemic. 

So, while Uber's ride volumes were down about 80% in April, gross bookings for Uber Eats' businesses were up 52% from a year earlier in the first quarter. And that makes perfect sense. People haven't been getting in a car and going to eat at a restaurant or grabbing a drink with a friend. They're sitting at home, told not to leave unless it's “essential.” So having someone deliver food and drinks from your favorite restaurant became the easy and obvious option. 

Uber Eats' business has been a saving grace for the company’s top line during this pandemic. It should be really thankful that it didn’t solely depend on ridesharing for its revenue. It explains why Uber has been focused on expanding that part of its business... and working to merge with competitor Grubhub since early this year. However, Grubhub’s asking price has made it difficult for that merger to come to fruition. 

Those acquisition talks are reportedly happening again. Uber could pay over $60 per share for Grubhub, which would be considered a premium over the $47 price tag shares traded at before these two companies began acquisition talks. During Uber’s third-quarter earnings call last year, CEO Dara Khosrowshahi said, “Our strategy for Eats is simple: invest aggressively into markets where we’re confident we can establish or defend a No.1 or No. 2 position over the next 18 months.” This is why Uber would pay a premium for Grubhub so that it could dominate this market. 

Uber needs to lead this market in order to scale out and become profitable. Grubhub could offer Uber superior logistics technology and would help Uber expand its network of customers, couriers, and restaurants. Being the biggest food delivery service in the market would allow Uber to have lower acquisition costs for all three of those aspects of the network. 

Uber's offer would value Grubhub at $6.9 billion and give Uber Eats 55% of the delivery market along with 24 million active users. Grubhub has received some scrutiny concerning the amount of money it gives to restaurants. If it were to stay isolated and not merge with Uber, it could eventually become a company that no one uses. A merger between these two companies would be beneficial to both in the long run. 

Scott Absher, co-founder and CEO of ShiftPixy, a platform for restaurants, said this about an Uber-Grubhub merger:

This is a survival play for both of these third-party platforms, Grubhub and Uber Eats. They are going to have to reconcile themselves with the storm that’s coming. The pushback on commissions is strong and it is not stopping.

The food delivery market was growing before the pandemic, and the pandemic took that growth to full speed. People who weren’t accustomed to ordering food through these platforms pre-pandemic have now made them a part of their “new normal.” 

Uber needs to become profitable and this is the most logical step to make that possible. 

Until next time, 

Jennifer Clark
Pro Trader Today
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