This was written by Hoang Minh – Cambridge Econ Student and me

Just Eat Takeaway (JET), a European food delivery service, announced to buy Grubhub for $7.3 billion on June 10, 2020. This deal would allow JET to set a foothold in the United States and create one of the world’s largest meal-delivery companies as the coronavirus pandemic drives a surge in orders.

Deal overview

Grubhub profile

Grubhub (NYSE: GRUB) is an online and mobile food-ordering and delivery marketplace operating within the United States and the United Kingdom, featuring over 300,000 restaurants with over 27 million active diners. Before the acquisition, Grubhub has a market capitalization of $5.8bn (as of May 12).

Just Eat Takeaway profile

Just Eat Takeaway.com (AMS: TKWY, LSE: JET) is a company based in the Netherlands that also operates an online food delivery marketplace and is present in European countries with over 205,000 connected restaurants. Before the acquisition, JET has a market capitalization of $56.8bn (as of May 12).

Transaction type

The deal is an all-stock transaction in which JET valued Grubhub at $75.15 per share, a 27% premium to Grubhub’s closing price of $59.05 (as of June 10). Grubhub’s founder and chief executive, Matt Maloney, will join JET’s board and oversee its business in North America.

Shareholder impacts

Towards the announcement, investors’ reaction was mixed. Grubhub shares rose 9% in after-hours trading before settling to about 6.2% above closing price, while JET stock fell 10.79%. On the other hand, Uber shares fell another 1.38% in after-hours trading.

Birthed from a failed deal

The interesting point about this deal is that it has been catalyzed by a failed negotiation between GrubHub and UberEat. Back in May, Uber offered to buy Grubhub, following a downturn in its car-booking business, and looked for a potential acquisition to ease the cost pressure in the food delivery space. The deal immediately came under fire from lawmakers and antitrust experts due to worry over a possible monopoly scenario where UberEat would own a total market share of 37% in the US. This would be problematic from both customers’ perspective – to suffer a higher price and restaurants’ perspective – to face the threat of having to pay more commission fee than the already-high 30% to get listed on these apps.
Consequently, Grubhub then turned to JET, a European rival with no presence in the US which should attract no scrutiny from lawmakers. The merger, therefore, would not fundamentally change the landscape of the US food delivery market, but would benefit US consumers by allowing Grubhub to price more competitively. This would, in turn, put Grubhub in a stronger position to expand aggressively.

A financial safenet for Grubhub and A global footstep for JET

From Grubhub’s perspective

How swiftly the deal with JET has progressed showed the immense pressure for Grubhub to consolidate in a competitive market like the US. Grubhub has experienced an erosion of its margins, just like UberEats, DoorDash and Postmates. In 2019, EBITDA margin fell from 26% to 6.1% while making a net loss of $18.6m. Among the three big players, Grubhub has the highest commission fee structure of up to 30%. Therefore, Grubhub will need to step up subsidies for its partners if it wants to expand further. And the deal with JET would accomplish exactly that. By tapping on JET’s strong balance sheet, Grubhub can bring the fees down to a more competitive level.

From JET’s perspective

On the other hand, JET has the vision to become a dominant player globally. Over the past five years, it has been engaging in a shopping spree of several rival sites, including the recent $8.6bn Just Eat merger in late April. The merger with Grubhub will create the largest food delivery group outside China, with combined revenue of $3.3bn that allows JET to obtain something many European rivals have failed to secure: access to the US market and brings them in the line for global domination against UberEats, Delivery Hero and Meituan Dianping. Furthermore, JET has the financial capability, with profits from various reliable western European cities, to aggressively expand in the US market. This is partly why JET is a suitable buyer in this transaction.

Beware of the cost side

Coming short of cost-synergy expectation

While the lack of overlapping geography has been a lubricant for the deal to take place, it might eventually become an obstacle for Grubhub and JET to meet the margin improvement expectation, as there is little common space for cost synergies. Moreover, as Grubhub is now in need of strong cash injections to continue competing in the US, JET’s financial health might be damaged, which is why investors initially did not respond positively to the deal.

Troubled business model

The sharing economy in general and specifically the food delivery industry have been notorious for the cash-burning characteristic. Competitors all eventually step into the “discount” and “delivery” game, the same way Grubhub changed its business model in an attempt to attract more restaurants and eateries. The acquisition, therefore, is only a short-term solution, and it’s left to the leadership to come up with strategic plans for a more sustainable business model.

M&A Frenzy in the sharing economy

Even as Covid-19 has led to a surge in demand for food delivery, the industry has been characterized by fierce competition that demands extreme subsidies to gain and keep customers. Uber Eats, DoorDash and Grubhub have all spent millions of dollars on marketing and incentives to lure customers away from the others. The result of that is a tight profit margin. Therefore, dominant players were actively looking for consolidation opportunities as the best way to improve profitability. In 2018 and 2019, there were 25 mergers and acquisitions in food delivery, valued at a combined $20.12 billion.
This acquisition trend is expected to be dominant, not only in food delivery, but also in other sharing-economy industries like ride-hailing, highlighted by the recent M&A of Grab and Gojek. 2021 is therefore full of expectation for even more resonant announcement of big sharks and small fish.

Fierce competition ahead

As big restaurants have already been given access to the platforms, smaller-sized ones are now becoming the targets of the 3 biggest food delivery apps. However, small eateries are not in the strongest financial position to offer delivery, while customers’ demand for door-to-door service is soaring due to the pandemic. Therefore, they are inclined to partner with the one that provides the cheapest food delivery service, and Grubhub-JET might not be the one.
The delivery business model has long been applied by UberEats and DoorDash since their inception. The established expertise and higher market share give UberEats and DoorDash more economies of scale and more efficient operation in terms of delivery. Meanwhile, Grubhub has only recently primarily switched to this model, after seeing its market share tumbling from 70% in 2017 to around 30% in 2019. Notably, JET also mainly focuses on offering a marketplace for takeaway outlets.
Consequently, Grubhub and JET should be prepared for the scenario that it might be eaten up in a highly-competitive US market with only 3 big players now.

Reference:
1. https://www.cnbc.com/2020/05/12/grubhub-stock-halted-after-report-uber-is-eyeing-a-takeover.html
2. https://in.reuters.com/finance/stocks/company-profile/TKWY.AS
3. https://www.nytimes.com/2020/06/10/technology/uber-grubhub-just-eat.html
4. https://techcrunch.com/2020/06/10/just-eat-takeaway-confirms-its-gobbling-up-grubhub-in-a-7-3b-deal/
5. https://www.npr.org/
6. Capital IQ
7. https://www.forbes.com/sites/aliciakelso/2020/06/16/the-grubhubjust-eat-merger-signals-a-maturing-foodservice-delivery-market/?sh=34a47bdc4357
8. https://www.nytimes.com/2020/06/10/technology/uber-grubhub-just-eat.html