After weeks of being serenaded, Grubhub (NYSE:GRUB) has finally chosen a suitor.
The restaurant takeout marketplace will be sold to Just Eat Takeaway.com (OTC:TKAY.Y), a European leader in online restaurant takeout and delivery.
The agreement ends weeks of suspense over a potential tie-up between Grubhub and Uber (NYSE:UBER), which had been in talks to merge Grubhub, the #2 U.S. restaurant delivery company, with Uber Eats, the #3 domestic food delivery app. The combined company would have surpassed DoorDash as the U.S. leader and effectively created a duopoly in the industry.
Grubhub and Uber had struggled to an agree on a price, and Grubhub's demand for a "breakup fee," or a sizable payment from Uber to Grubhub if the deal were to be blocked by regulators, had also emerged as a sticking point. Selling itself to Just Eat Takeaway.com therefore seems to be the better move for Grubhub, as it avoids many of the antitrust concerns that a merger with Uber would have solicited.
A global restaurant delivery behemoth
The combination of Grubhub and Just Eat Takeaway.com will create the biggest restaurant delivery company in the world outside of China. Just Eat and Takeaway.com recently merged, and the company also owns SkiptheDishes, the industry leader in Canada.
Combined, the two companies processed 593 million orders last year, served 71 million customers, and generated $3 billion in revenue.
In an all-stock deal, Grubhub will receive ADRs (American depositary receipts) representing 0.671 of Just Eat Takeaway.com shares for each Grubhub share. Based on Just Eat Takeaway.com's closing price on June 9 of 98.60 euros, the deal valued Grubhub at $7.3 billion, or $75.15 per share.
However, Just Eat Takeaway.com stock plunged when the news broke, and closed Thursday at 82.24 euros, down 16.6% from its closing price Tuesday. That shows that investors in the European company are skeptical of the deal, which still awaits shareholder approval. For Grubhub investors, however, the decision is a no-brainer. They should take the money and forget they ever heard the phrase "food delivery app."
A reality check
In its press release announcing the agreement, Just Eat Takeaway.com touted that both it and Grubhub were profitable, a rarity in the industry, but the reality is that Grubhub's business has fast been eroding amid competiton from Uber Eats and DoorDash.
Grubhub, which owns a number of other brands including Seamless and Eat24, once dominated the U.S. restaurant delivery landscape with 70% market share as recently as 2017. But that has fallen all the way to just 23% in April 2020, according to data from Second Measure. Uber Eats and DoorDash came in with deep pockets, backed by Softbank, and disrupted the industry by providing delivery to restaurants instead of just being an online ordering platform as Grubhub had traditionally been.
Grubhub followed its new competitors into delivery, but that move and the market share war that's ensued have proven costly. Shares of the food delivery specialist peaked at $149.35 in September 2018 before crashing all the way to $32.11 last October following a dismal earnings report. The plunge in the stock reflected a dramatic change in its fortunes as it had lost significant market share, revenue growth had slowed and profits had evaporated.
Last year, Grubhub reported a net loss on a generally accepted accounting principles (GAAP) basis of $18.6 million compared to a profit of $78.5 million in 2018, and revenue growth slowed substantially in the second half of 2019. In the first quarter of 2020, Grubhub's revenue rose just 12%.
While the pandemic has caused top-line growth to accelerate in the second quarter, that's come at the expense of restaurants themselves, which are facing a mortal threat unlike anything before it. According to some estimates, as many as one quarter of restaurants could close for good because of the COVID-19 pandemic , and restaurants' sudden reliance on delivery apps like Grubhub has led to a brewing backlash and even lawsuits from restaurants that claim that these apps charge exorbitant fees, sometimes for services they didn't ask for. Grubhub sees itself as a lifeline during the crisis, but to independent restaurants it appears to be more of a noose.
A number of U.S. cities have also imposed limits on delivery fees from third-party providers like Grubhub after complaints from restaurants.
The party's over
Just Eat Takeaway.com may see an opportunity during the pandemic to accelerate the consolidation in the industry as well as its global expansion, but Grubhub itself seemed to understand the severity of the crisis, as it said it would spend the profits it would have generated on marketing to bring more sales to independent restaurants, as well as on safety measures and other steps to support the takeout ecosystem. As a result, the company guided to just $5 million in adjusted EBITDA in the second quarter.
At this point in its history, Grubhub is badly wounded. It's lost its status as the industry leader, and profits and revenue growth have slipped away. That shift has forced Grubhub to make awkward moves like adding "non-partnered" restaurants, which don't necessarily want Grubhub delivering their food, and that looks like a sign of desperation. Meanwhile, the restaurant industry is in crisis mode, and resistance against the third-party delivery model is rapidly building. If restaurants can provide delivery themselves, services like Grubhub don't really add much value.
The restaurant delivery industry needs to consolidate, as most of the major players are still unprofitable. There's no reason Grubhub has to be the last app standing. Investors should be happy to bow out of a race that increasingly looks unwinnable.