Earlier in the week , the Wall Street Journal reported that the two companies were in talks for a transaction in which Uber (UBER) would buy Grubhub (GRUB) in a stock deal, paying 2.15 Uber shares for each Grub share. Uber offered to do the deal at 1.9 of its shares per Grub share, according to the Journal. At the higher level, Grubhub shares would be worth about $70 a share; at the lower end, the price would be around $60.
Thursday afternoon, Grubhub shares were down 6%, to $54.64, but still up 17% for the week. Uber was off 2.9%, at $32.07, and is now down slightly for the week.
Uber hasn’t responded to requests for comment. Grub hasn’t commented specifically on a potential Uber transaction, but did say in a statement that “consolidation could make sense in our industry, and, like any responsible company, we are always looking at value-enhancing opportunities.”
CNBC reported Thursday morning that either a deal will come soon, or there won’t be a deal at all—and so far, they apparently can’t reach an agreement on price.
It is interesting that Uber this week announced a $750 million debt offering, noting the possibility that proceeds could be used for acquisitions, but that there doesn’t appear to be a cash component to the deal terms, at least not yet. Before announcing the debt offering, Uber had about $9 billion in cash and equivalents, and around $5.7 billion in long-term debt.
There is widespread agreement on the Street that the food delivery market is too crowded, and that consolidation is inevitable. The field includes two larger players—Uber Eats and DoorDash—and two smaller ones, Postmates and Grubhub.
Both Postmates and DoorDash are privately held venture-backed companies that have filed confidentially with the Securities and Exchange Commission for initial public offerings. There is little hope that either can go public any time soon with the IPO market effectively shut down.
All four companies have seen demand spike recently because most restaurants are open only for takeout and delivery, and most consumers are largely stuck at home. But the companies have also reduced fees charged to restaurants, while providing additional safeguards to their delivery staff, including “contactless delivery,” a fancy way of saying the delivery person will leave the food outside the front door.
But there are complications. For one thing, delivery fees are coming under new scrutiny, given the fragile state of the restaurant industry. In New York this week, the city council voted to place a 15% ceiling on meal-delivery charges. That measure that has the biggest impact on Grubhub, which dominates the food-delivery market in New York.
Meanwhile, Wall Street analysts are becoming a little concerned about the regulatory risks in an Uber Eats/Grubhub deal. A combined company would leap ahead of DoorDash to be the industry leader, with 50% of the U.S. market, and a dominant share in many cities.
“We believe consolidation would improve the profit pool for the industry, and complementary strengths in Grubhub’s restaurant supply and Uber’s delivery network are obvious and compelling,” SunTrust Robinson Humphrey analyst Youssef Squali wrote in a research note. “That said, regulators are likely to take a hard look at the deal, as the combined entity would have considerable market share and power in certain localities.”
The combined business would have 78% of the New York market, with 60% or more of the market in Boston, Chicago and Miami.
Morgan Stanley’s Brian Nowak lifted his target for Grubhub’s stock price to $49, from $46. He noted that as a result of the Covid-19 crisis, online food delivery demand has spiked, with a gain of 50% in April for Grubhub, and a 90% increase for Uber Eats.
“Years of adoption is potentially being pulled forward,” he wrote. Nowak added that “while we believe industry consolidation makes strategic sense, we would expect any potential acquisition to be closely reviewed by regulators given the potential long-term market influence and impact on small and large restaurants.”