Don't Bet Your Lunch Money on a GrubHub Buyout!

After news broke that OpenTable would be acquired by Priceline Group for a hefty sum, shares of GrubHub soared in anticipation that it, too, might receive an offer. While this is possible, the odds are significantly stacked against the business.

Jun 23, 2014 at 11:30AM

Picture

Source: GrubHub. 

After news broke on June 13 that Priceline Group (NASDAQ:PCLN) would be buying OpenTable (NASDAQ:OPEN) in a transaction valuing the firm at $2.6 billion, shares of not only the acquired business but also GrubHub (NYSE:GRUB), one of the firm's competitors, moved higher. Based on Mr. Market's reaction, it appears as though investors might be anticipating a buyout offer from another company for GrubHub, but is it more likely that the possibility of such a deal is overstated?

Does Priceline's Purchase of OpenTable make sense?
In exchange for $2.6 billion in cash, Priceline will be taking hold? taking hold of a profitable and fast-growing enterprise. In its most recent annual report, OpenTable claimed to have revenue of $190.1 million, up 36% from the $139.5 million the business reported two years earlier. The main contributor to this increase in sales was its number of diners seated, which soared 61% from 89.5 million to 144.1 million.

From a profitability perspective, the reservation service has done even better. Between 2011 and 2013, the company saw its net income skyrocket 55% from $21.6 million to $33.4 million. In addition to benefiting from higher revenue, management reported a nice improvement in its cost structure, primarily its cost of goods sold, which fell from 28.2% of sales to 25.4%.

OPEN Revenue (Annual) Chart

OPEN Revenue (Annual) data by YCharts.

Although the business is a costly transaction for Priceline, it will likely be easy for the company to scale up its operations. Currently, more than 1 million guests are placed in hotels every night under Priceline across 480,000 properties. With just 31,553 restaurants using its services, OpenTable is small by comparison, but given the significant size of its acquirer, it seems realistic that Priceline can grow its operations and profitability immensely.

Don't expect such a deal with GrubHub!
Based on the potential for Priceline to grow OpenTable's operations, it would be reasonable to expect one of the company's competitors making a bid for rival GrubHub. Unfortunately, though, the likelihood of such a transaction seems to be slim given both the cost and profitability of the reservation site.

Using 2013's metrics, GrubHub is being valued by Mr. Market at 20 times revenue and 412 times profits. By both measures, this is far more expensive than OpenTable, which is being bought out for just under 14 times revenue and 78 times profits. If the company were a higher-margin business, it would make sense for there to be a substantial premium, but this is not the case.

(current trading multiple) OpenTable GrubHub
Market Cap/Revenue 14 20 
Market Cap/Earnings 78 412

Source: Yahoo! Finance.

Between 2011 and 2013, GrubHub saw its revenue climb an impressive 126% from $60.6 million to $137.1 million. During this same period, however, the business's net income fell by 56% from $15.2 million to $6.7 million. Despite seeing higher revenue, management reported an increase in its cost of goods sold, which rose from 32.3% of sales to 36.1%.

Picture

Source: GrubHub.

This disparity suggests GrubHub is focusing more on growth than it is on profits, which has the potential to create value down the road. On the other hand, it also points to a picture where a buyout offer would carry with it little to no premium over its current price.

Foolish takeaway
It seems Priceline might be making a good choice by gobbling up OpenTable. In addition to opening a new door of opportunity, Priceline appears to have done so at a fraction of what it would have cost to acquire GrubHub. In response to this strategic move, it wouldn't be out of the question for one of Priceline's peers to snatch up GrubHub, but given how expensive the company already is, any deal seems unlikely and, if completed, would almost certainly be at a smaller premium than OpenTable's was.

Leaked: Apple's next smart device (warning, it may shock you)
One of the best ways to access GrubHub and OpenTable has been to use your handy, dandy smartphone.  Now, however, Apple is working on a piece of wearable technology that could bring a whole new world of mobile to the forefront. 

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Priceline Group. The Motley Fool owns shares of Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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