Yahoo Finance Why buying Grubhub could be huge for Uber
A potential tie-up between Uber (UBER) and Grubhub (GRUB) could balloon the ride-hailing company’s market share and create long term synergies, according to Morningstar senior analyst Ali Mogharabi.
“For Uber, such a deal would imply around $1.9 billion in synergies, which may benefit Uber in the long run but not necessarily right away,” Mogharabi wrote in a note to investors.
Uber’s food delivery business Uber Eats, has been a bright spot for the company amid the coronavirus pandemic and shelter in place measures nationwide.
“In our view, the addition of Grubhub (which would increase Uber’s U.S. market share to around 48%, based on data from Second Measure) could strengthen the supply and demand sides of Uber’s network effect moat source, which may create synergies with lower restaurant, driver, and diner acquisition costs,” wrote Mogharabi.
The analyst highlights that on the supply side, Uber would be better able to attract and retain restaurants. More food delivery requests would also allow Uber “to maintain more of its ride hailing drivers and increase utilization of each,” he said.
“On the demand side, Grubhub will add to Uber’s diners, which will further attract restaurants and drivers,” wrote Mogharabi.
“Plus, we think over time, this may not only reduce diner acquisition costs for Uber but will also allow Uber to more effectively cross-sell its two main businesses to a larger user base.”
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On Tuesday, Grubhub shares closed 29% higher following a report from Bloomberg about a takeover offer from Uber.
Consolidation in the food-delivery platform space has been talked about among analysts for months now, with some saying its inevitable in order to drive sustainable profits and scalability.
Even Domino’s Pizza CEO Richard Allison has said some sort of a shakeout in the third-party delivery space has to happen.
Prior to the COVID-19 pandemic, Grubhub’s CEO Matt Maloney told Yahoo Finance, “Everyone is very fixated on consolidation. It’s not pre-ordained. There is no reason that two is better than four or five.”
“What we have proven is that you can successfully buy scale, but you aren’t going to buy scale at an obscene price. It has to be accretive to our shareholders. If there is an opportunity to expand our scale and better leverage our delivery, loyalty and sales infrastructure and product and engineering of course we would do it,” added Maloney.
Morningstar’s note highlights if an agreement between Uber and Grubhub is reached, it would likely face regulatory and antitrust barriers.
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Ines covers the U.S. stock market from the floor of the New York Exchange. Follow her on Twitter at @ines_ferre
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