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Uber's potential takeover of Grubhub could kick off more delivery consolidation

A potential takeover of Grubhub Inc. by Uber Technologies Inc. could jump-start additional consolidation in the growing meal-delivery business, though any deal is likely to raise antitrust concerns as the industry gains momentum during the coronavirus pandemic, experts said.

The companies, which both offer meal delivery from a range of restaurants, are reportedly in talks over a possible all-stock combination. They have yet to agree to a price, multiple media outlets reported May 12. Neither company has confirmed the particulars of those reports, though Grubhub said following the reports that consolidation could make sense.

An Uber spokesperson told S&P Global Market Intelligence in an email that the company is "constantly looking at ways to provide more value to our customers, across all of the businesses we operate."

Experts have long viewed third-party meal delivery companies as prime consolidation targets ever since the companies upended takeaway service from restaurants. The U.S. market is dominated by Uber Eats, Grubhub, DoorDash Inc. and Postmates Inc. Demand for their services is growing after the coronavirus pandemic shut down dining rooms and ushered in the era of social distancing. Still, many companies are losing money and facing a backlash that has led to cities like San Francisco and Washington, D.C. capping fees that delivery providers charge to restaurants.

A pairing of Uber and Grubhub would give two of the largest players in the U.S. competitive advantage in dealing with a shifting landscape and force their rivals to consider following suit, experts said.

"I think the first major acquisition will likely kick off at least one more or two more," Jason Ware, partner and chief investment officer at Albion Financial Group, said in an interview. "I think out of necessity there's going to be maybe an accelerated review of some of these other companies on what an acquisition looks like."

Crowded plate

As of March, Uber's meal delivery arm Eats had 20% of the U.S. meal delivery market and Grubhub had 28%, according to the Second Measure Data Points blog. DoorDash claimed 42% of the market and Postmates had 9%.

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At the city level, market leaders depend on location. Grubhub claimed 62% of the market in New York in March and 15% of the market in San Francisco, while DoorDash took 65% of San Francisco and 17% of New York. The varying market shares are part of what makes a combination between Uber and Grubhub attractive for these companies, experts said.

"M&A to me is kind of a logical way to acquire market share and narrow the playing field," said Erik Herrmann, partner and head of the restaurant investment group at CapitalSpring, in an interview. "If I'm Uber Eats, I'm looking at DoorDash and maybe by buying Grubhub that now enhances my position."

Uber Eats makes up a fraction of Uber's overall business, accounting for $2.51 billion of the company's $14.15 billion in revenue for 2019, and has been an ongoing part of the company's struggle for profitability. But while Uber's main ride-hailing business has taken a significant hit during the coronavirus pandemic, the company's meal-delivery arm has gotten a lift. Uber has focused its meal delivery efforts on markets where it is in first or second place, which has led to the company's exit from some international markets.

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With its smaller market cap, Grubhub would benefit by having access to Uber's war chest, experts said. The coronavirus has spurred more customers to Grubhub's platform and existing ones are ordering more frequently, executives said during a post-earnings call May 7. But Grubhub has withdrawn its fiscal 2020 guidance because of the coronavirus crisis.

Uber and Grubhub serve many of the same diners, restaurants, and markets, which should help a combined company save money on sales and marketing expenses, Wedbush analyst Daniel Ives said in a May 12 report.

"Any acquirer of Grubhub would ultimately be buying specific market strength, like NYC, Boston, and Chicago, at a premium in order to speed up rationalization through market share dominance," Ives said.

Other players have also reported their own mixed results with meal delivery. Privately held players DoorDash and Postmates recently filed to go public, but the pandemic is holding back many IPOs. DoorDash and Postmates did not immediately respond to a request for comment.

Amazon.com Inc. offered delivery from restaurants for years but shuttered the business in June 2019.

Hair in the butter

Even as it makes good financial sense to many for the meal-delivery business to undergo some consolidation, some experts say a Grubhub-Uber combo would give antitrust regulators heartburn.

"We do not believe this potential acquisition of Grubhub by Uber, if true, would easily pass regulatory scrutiny," Peter Saleh, a BTIG analyst, said in a May 12 report. "Given the significant market share a combined company would enjoy in the food delivery sector, we believe regulators would think twice."

Then there's the 10% to 15% fee caps cities have implemented and are not expected to be eliminated "especially if both companies merge," Saleh said. Major cities like San Francisco, Washington, D.C. and Seattle have implemented fee caps and New York City is considering establishing one too. Meanwhile, Chicago established measures to increase transparency on the pricing structure offered by third-party delivery companies like Grubhub.

As more localities limit what delivery companies can charge restaurants a big question looming over the industry is whether it will be able to get away with charging consumers more, Herrmann said.

"Do consumers value the service? Yes," Herrmann said. "Do they value it less if it's priced higher? Absolutely. Is that going to be tested? For sure."