Food delivery – Bloodbath extended.

The future of Grubhub is still bleak. 

• Grubhub has decided to sell itself to Just Eat Takeaway rather than Uber in a move that cited regulatory risk but in reality, will result in a continuation of the bloodbath.
• In a hurriedly put together deal, Just Eat Takeaway will acquire Grubhub in an all-share deal that values Grubhub at around $75.15 per share where Grubhub shareholders will end up with ADRs on Just Eat Takeaway’s shares that are listed in Amsterdam.
• There is very little overlap between the two companies with Just Eat being strong in the UK, Germany, Canada and The Netherlands and GrubHub being predominantly in The USA.
• Hence, I think the real motivation for this deal is independence where the management of Grubhub will still get to run their show which something that would not have happened if Uber had taken over.
• In mergers and acquisitions, low overlap is usually viewed as a good thing because low overlap means that there is not much excess capacity to be trimmed and economies of scale can be earned from common group functions.
• However, in the networked economy, I do not think that this is the case.
• This is because food delivery, like ride-hailing, classifieds and so on it is a winner takes all business where money is only made when one reaches the hallowed position of market dominance.
• There are no real barriers to entry for any of these businesses meaning that one can only increase prices when one has become the go-to place to buy or sell the product or service in question.
• 4½ years ago, I coined a rule of thumb (see here) which states that in order to reach market dominance (and make money) the business needs to obtain 60% market share or be double the size of its nearest competitor.
• In its home markets, Just Eat Takeaway has not made it yet meaning that in real terms (GAAP rather than adjusted) it is not making money.
• Hence, its combination with GrubHub will do nothing to alleviate this pressure and now means that the combined group will now be fighting the war on two fronts.
• A combination with Uber would have yielded around 50% market share just ahead of the main rival DoorDash triggering a straight fight to the finish.
• Now Just Eat Takeaway will have to fight both Uber Eats and DoorDash in the US who are both bigger and stronger and have steadily eroded Grubhub’s market leadership.
• Hence, I don’t think that this acquisition is going to work and the fact management that squandered Grubhub’s leadership is staying in place greatly raises execution risk in my opinion.
• The only real winners from this deal are the shareholders of Grubhub who will exit at $75.15 rather than something much lower and will now have more time to exit the enterprise entirely.
• This acquisition is going to cost a lot more than $7.3bn as the bloodbath for market share will now continue with more players for a greater period of time.
• The pandemic is obviously good for the top line as many restaurants are being forced to try takeaway just to stay afloat as dine-in remains impractical, but it is the bottom line that really matters.
• This is likely to remain in the red for a long time and will put strain the new company’s balance sheet as well as its market value.
• I would not be anywhere near any of these stocks and if I was, I would take the gift being offered and run for the hills.