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Uber’s Grubhub Bailout Won’t Do Anything for Uber Stock

Grubhub (NYSE:GRUB) is trading near its 2020 high after a report that Uber (NYSE:UBER) wants to buy it. The reported price is $6 billion in Uber stock. The ride-hailing company thinks there are $300 million in cost synergies.

Source: Lori Butcher / Shutterstock.com

Together, the two companies would control 55% of the food delivery platform market, according to Wedbush Securities, and up to 80% in big markets like New York.

What sounds like a great deal for Uber stock may be a bailout for Grubhub.

The Grubhub Story

Grubhub began life in 2004 to put restaurant menus online. It began buying delivery companies in 2013, merging with Seamless, which had briefly been part of Aramark (NYSE:ARMK). Later it swallowed DiningIn, Delivered Dish, LAbite and Eat24. Grubhub also bought a payments company, LevelUp.

The consolidation was welcomed by investors. At one point in September 2018, Grubhub stock traded for $145 per share.

But competition was coming to the space from other national brands, including Uber’s Uber Eats. Privately held DoorDash now has 42% of the market. That company was preparing to go public when the novel coronavirus hit. So was Postmates, with 9% of the market, according to research by Second Measure.

The Uber Stock Story

While Grubhub controls the restaurants, Uber controls the drivers.

Uber has 71% of the ride-hailing market, according to Second Measure. But the pandemic cut revenue in half during March. Uber Eats became Uber’s lifeline. Having drivers make deliveries keeps more of them working and sounds like a win-win situation.

But Uber’s reputation, built mostly by Travis Kalanick, pushed out as CEO in 2017 after a series of scandals, remains poor.

That reputation will now be tested by restaurants that have become dependent on delivery services. Delivery fees and commissions can command 30%-40% of the price of an order. Tension has been rising, with some cities putting emergency caps on fees. New York City recently joined them.

What Happens to the Deal After the Pandemic?

A combined Uber and Grubhub would, in theory, be able to push back against restaurants and government. Consolidation usually increases prices and profits.

Even as delivery platforms consolidate, however, restaurants still have more than half of their delivery market, according to Statista.

Some are responding to the cost of platforms by sharing a few drivers to create local services. Others urge customers to pick up orders rather than ask for delivery. Restaurants filed a class-action suit against the platforms last month, charging them with controlling menu prices and driving them under.

The merger seems like a logical one during the pandemic. Uber gets order flow to increase its control over drivers, many of whom also drive for rival Lyft (NASDAQ:LYFT). The combination of Uber and Grubhub could push back against restaurants and their local government allies.

But what happens after the pandemic fades? It will fade, probably in about a year, with dozens of vaccine candidates already under trial. Delivery may decline as ride-hailing demand returns.

The Bottom Line on Uber and GRUB Stock

The merger looks like a great deal for Grubhub, which was running out of ideas. But will it actually help Uber stock?

Uber went public a year ago, and still hasn’t traded above its IPO price of $45 per share. At the height of the pandemic shares were trading below $22. They opened May 14 at about $32.50.

Uber CEO Dara Khosrowshahi, hired to fix Uber’s image problems in 2017 after leading Expedia Group (NASDAQ:EXPE), has yet to deliver consistent profits. Last year’s loss was $8.4 billion, $6.81 per share. Grubhub also lost money in 2019. That was before the pandemic.

You may believe Khosrowshahi, like Rumpelstiltskin, can spin this straw into gold.

I don’t.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/uber-stock-grub-stock-coronavirus-bailout/.

©2022 InvestorPlace Media, LLC