Further consolidation in the food delivery industry is likely only to hurt local restaurants
After months of speculation that Uber could acquire GrubHub (NYSE: GRUB), the latter company decided to merge instead with a European food delivery company Eat just take-out.com (OTC: TKAY.Y). The prospect of combining Uber Eats with GrubHub had already started to repulsion from lawmakers on anti-competitive concerns.
Unfortunately, further consolidation of the global food delivery industry is likely to only hurt small local restaurants.
How the agreement is structured
By acquiring GrubHub, Just Eat Takeaway.com seeks to expand into the US market while building the world’s largest food delivery platform outside of China. The transaction is structured as an all-equity transaction, with GrubHub shareholders receiving US certificates of deposit (ADRs) representing 0.671 Just Eat Takeaway.com shares per GrubHub share.
Based on the value of Just Eat Takeaway’s shares at Tuesday’s close (before the companies admitted they were in merger negotiations), the deal values each GrubHub share at $ 75.15, which which translates to a total stock valuation of $ 7.3 billion. GrubHub investors will own approximately 30% of the combined company after the transaction closes. Investors appear somewhat skeptical of the deal, as Just Eat Takeaway.com stock fell after the announcement, reducing the implied value of GrubHub stock.
GrubHub Founder and CEO Matt Maloney will join the management team of Just Eat Takeaway.com and be in charge of the business in North America. Just Eat Takeaway.com already owns SkipTheDishes, a leading food delivery platform in Canada.
The merged company will have approximately 71 million active customers in 25 countries, with more than 360,000 partner restaurants on its platforms.
Is a Combination Business a Good Thing?
Food delivery technology companies have come under criticism recently, with growing criticism that the platforms charge exorbitant fees that hurt small local restaurants. GrubHub has been accused of inflating its commission rates by setting up websites and phone numbers on behalf of restaurants without their approval, charging fees for non-existent phone orders while taking higher commissions on referrals from Web sites.
Consumers have filed a class action against many platforms for anti-competitive reasons, alleging that large companies abuse their market power and that the higher fees will be passed on to consumers in the form of higher prices. The non-partner restaurants have also filed a separate class action lawsuit, alleging that GrubHub falsely claims that restaurants are closed in an attempt to entice consumers to order from a partner restaurant.
GrubHub has leveraged numerous acquisitions and mergers throughout its history to become the dominant force it is today. Further consolidation loans in the food delivery industry will only give major platforms even more market power, inevitably at the expense of mom-pop restaurants struggling to survive during the COVID-19 pandemic.
Despite all the alleged questionable business practices and past consolidation, GrubHub recorded a net loss of $ 18.5 million in 2019 – before the coronavirus outbreak escalated into a global crisis – in part due to massive spending on marketing and incentives. Just Eat Takeaway.com recorded an after-tax net loss of 115.5 million euros last year, or about 130 million dollars based on current exchange rates. GrubHub and Just Eat Takeaway.com say the merged company will be “one of the few profitable large-scale players in the space.”
It may not be that easy for an industry known to burn cash raised from investors, often through promotions to attract customers who are not necessarily loyal to any platform. For example, DoorDash, a private peer, is said to be preparing to raise several hundred million dollars in a new round of fundraising with mutual funds after losing around $ 450 million last year.
The latest merger is expected to end in the first quarter of 2021.
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