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Uber and Postmates deal narrows meal delivery playing field in coronavirus era

Uber Technologies Inc.'s deal to buy Postmates Inc. will help give the ride-hailing giant a bigger foothold in the food delivery business and could be the last of the major consolidation moves in the industry, according to experts.

Uber on July 6 confirmed plans to buy the smaller but significant food delivery rival Postmates in an all-stock deal valued at about $2.65 billion. The widely expected deal comes less than a month after merger talks between Uber and Grubhub Inc. broke down and Grubhub agreed to combine with Netherlands-based Just Eat NV in a deal valued at $7.3 billion. The two back-to-back deals mean that there is little room left for M&A activity in the meal delivery space, said Robert Mollins, a Gordon Haskett analyst.

Uber plans to continue using the Postmates brand and platform in a U.S. meal delivery market that has expanded as the coronavirus pandemic closed dining rooms and forced more people to stay indoors. Uber's acquisition of privately held Postmates is an aggressive move to take out a competitor to its Uber Eats division and further consolidate its market position, Ygal Arounian, a Wedbush analyst, said in a July 6 note ahead of the announcement.

San Francisco-based Postmates held 8% of the U.S. meal delivery market in May, while Uber had a share of 22%, according to data analytics company Second Measure. Even as a combined entity with a market share of 30%, it would trail market leader DoorDash Inc.'s share of 45%. But a merged company would edge out rival Grubhub, which had 23% of the U.S. market based on the same data. But the various players have footholds in different regions, and market shares vary when looking at them by city. Postmates is the market leader in Los Angeles, while Uber Eats is the market leader in Miami and the No. 2 player in Atlanta, according to Second Measure.

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"This transaction combines our Rides and Eats platform and deep logistics expertise with Postmates' brand and distinctive delivery assets in the U.S.," Uber CEO Dara Khosrowshahi said during a July 6 conference call about the deal. "The combination of Uber Eats and Postmates is also expected to drive significant efficiencies and cost savings that will allow us to bring benefits to all sides of the marketplace, including consumers and restaurants."

Khosrowshahi said the companies believe they can achieve more than $200 million in "run-rate synergies" a year after the acquisition closes. Postmates said in 2019 that it confidentially filed for an IPO, but that was before WeWork Cos. Inc.'s failed bid to go public cast uncertainty over public market debuts.

Shares in Uber closed up 6% at $32.52 on July 6.

The Uber and Postmates deal was a necessary move for the ride-hailing company's Uber Eats to remain competitive in the food delivery business and a signal to investors that there are profits to be made in the industry, experts said.

"Uber needed to do this," Gordon Haskett's Mollins said in an interview. "It's a low-cost way to acquire something."

Meal delivery companies have made acquisitions and promotions a feature of their growth strategies. The Grubhub-Just Eats deal and the Uber-Postmates deal likely mark the end of big M&A deals with companies buying out competitors, Mollins said. Future deals are more likely to involve ancillary tech companies involved with things like Point of Sale systems, Mollins said. He added that based on Uber's comments July 6, he does not expect the use of promotions to attract customers to slow down anytime soon.

"You're seeing companies still trying to buy other companies: that's just a positive in general," Mollins said.

Uber's acquisition of Postmates comes in the wake of increased scrutiny of the meal delivery business and big tech companies in general. Lawmakers and restaurants have complained about the fees meal delivery companies charge for their services, which helped throw cold water on the Uber and Grubhub talks and has led some jurisdictions to cap the fees restaurants can be charged.

Experts expect some antitrust scrutiny of the Uber-Postmates deal but do not anticipate major hurdles. An Uber spokeswoman declined to comment beyond what the company announced in its deal announcement and conference call. Postmates did not respond to a request for comment.

The increased scrutiny of tech companies could draw more attention to the Uber and Postmates deal, Fiona Scott Morton, a Yale University economics professor who specializes in antitrust matters, said in an email. She added that because more people are using meal delivery services, there will be more media attention on the deal.

Wedbush's Arounian said he does not expect antitrust concerns to thwart the deal.

"Unlike the Grubhub deal, we do not see antitrust concerns blocking the deal around market share and fewer regulatory red flags in general, but do still see some political headwinds as local governments continue to put pressure on food delivery companies by limiting fees and aiming to 'protect' their local restaurant constituents," Arounian said.