After a month of negotiating a potential merger with Uber Technologies (UBER, Financial), U.S.-based meal delivery company Grubhub (GRUB, Financial) has decided to go with Europe’s Just Eat Takeaway (XAMS:TKWY, Financial) instead. The all-stock deal, which values Grubhub at $7.3 billion (or about $75 per share), is expected to close in the first quarter of 2021.
Shares of Grubhub were up more than 5% following the announcement of the deal’s terms on Wednesday.
In a time when players in the food delivery space are looking to use their recent popularity as a launch pad for increasing scale, Grubhub’s decision not to pursue the Uber deal may come as a surprise to some. However, there are a number of reasons why the company might prefer a deal with Just Eat instead.
Market concentration
When knowledge of the talks between Uber and Grubhub became public in May, the potential for antitrust trouble became an immediate concern. Several members of the U.S. Congress sent a letter to antitrust officials, putting the proposed deal forward for scrutiny.
With the pandemic causing an increase in demand for meal delivery services, the timing for a merger is ideal, as companies looking for a buyer can now attract better offers. Consolidation among industry players would hold high potential to make business more profitable through cost synergies and increased scale.
A deal with Uber would help the combined company achieve greater market concentration in the U.S. Grubhub’s focus is on connecting diners with local restaurants in the U.S. Meanwhile, Uber has operations in every major inhabited continent, but the U.S. is its home turf. This is what has some wary of antitrust issues; if the companies merged, they could quickly become bigger than the current U.S. market leader, DoorDash, wiping out smaller competitors and decreasing industry competition.
On the other hand, a merger with Just Eat would also create a trans-Atlantic company, expanding Just Eat’s existing presence in 23 countries to the U.S. The deal will probably still draw some scrutiny, but it is far less likely to face any real regulatory walls from U.S. antitrust authorities because Just Eat is not currently a U.S. market participant. Just Eat also has a market cap of 5.23 billion euros ($5.91 billion), which is close to Grubhub’s $5.69 billion, compared to Uber’s $55.89 billion.
The deal
Though the potential for antitrust issues does exist, Grubhub CEO Matt Maloney told CNBC that the decision came down to which of the two companies offered a deal with better terms:
“The offer [from Just Eat] was dramatically better. It was a much higher offer. It was a mid-$60s offer versus a $75 offer. There was no comparison in terms of economics, there was no comparisons in terms of confidence to get the deal done and here we are and we can continue executing our aggressive financial competitive strategy and win.”
“Both of us have a firm belief that only businesses with high-quality and profitable growth will sustain in our sector,” Just Eat Takeaway’s CEO Jitse Groen said. “I am excited that we can create the world’s largest food delivery business outside China. We look forward to welcoming Matt and his team to our company and working with them in the future.”
Although the Just Eat Takeaway deal offers a higher valuation per share than Uber’s offer, both offers were all-stock deals, so much of the value for shareholders will come from the combined company’s future growth. Uber’s lower offer was based on the expectation that its share price would grow faster in the coming years.
Uber seems to be sticking to its guns in terms of its valuation of Grubhub. “Like ridesharing, the food delivery industry will need consolidation in order to reach its full potential for consumers and restaurants. That doesn’t mean we are interested in doing any deal, at any price, with any player,” an Uber spokesperson told CNBC.
Expansion vs. elimination
Uber and Grubhub are competitors in the sense that both operate meal delivery services in the U.S. On the other hand, prior to merging, Grubhub and Just Eat Takeaway will not be operating in each other’s target markets.
Thus, despite the surface similarities of the deals, a deal with Just Eat is purely expansionary, while an Uber acquisition would mean one less competitor for Uber. This important distinction means that the former deal would be primarily paying for the elimination of competition, while the latter would be paying for access to a new market.
As a result, the Just Eat deal will likely leave more of Grubhub’s existing operational and management structures in place as compared to the Uber deal. If the merger is successfully completed, Maloney will also join Just Eat’s management board and lead the combined company’s North America division, while two Grubhub directors will join the supervisory board.
Conclusion
The proposed merger between Just Eat Takeaway and Grubhub is still in its early stages and is still subject to shareholder and regulatory approval. The management of the two companies seems optimistic on the alignment of their goals.
While some may be surprised that Grubhub chose a smaller company over Uber given the stock price upside of Uber’s tech and rideshare assets, the Just Eat deal puts a higher valuation on Grubhub’s assets, both in the terms of the deal and in terms of an increase in the combined company’s addressable market.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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