June 10, 2020 / 11:22 PM / a month ago

Breakingviews - Just Eat-Grubhub deal requires fistful of antacid

Signage for Just Eat is seen on the window of a restaurant in London, Britain, August 5, 2019. REUTERS/Toby Melville.

NEW YORK (Reuters Breakingviews) - Consolidation in the food-delivery business in the United States is a tall order. But Grubhub Chief Executive Matt Maloney has managed to pull a deal off. The company he founded has agreed to a $7.3 billion takeover by European counterpart Just Eat Takeaway.com. There are some benefits, but swallowing the deal will require a fistful of antacid.

For starters, the buyer is still digesting its main course from last year when it put Just Eat and Takeaway.com in a dish together. And the premium it’s paying is high at 60% above where Grubhub shares were trading on May 11 before news about a potential tie-up with Uber Technologies broke.

Running an operation on the other side of the Atlantic, which Maloney will continue to oversee, means Just Eat boss Jitse Groen will have to maintain Grubhub’s sales force and keep the spigot on for costly customer acquisitions and restaurant retention. Any cost savings, should they exist, are nowhere near what could have been achieved with a Grubhub-Uber Eats union. UBS put those at somewhere north of $500 million by slashing 30% of Grubhub’s operating expenses.

Second, Just Eat is entering a cut-throat market and will have to compete not only with Uber Eats, but DoorDash and Postmates too. The most logical answer is for some of these stateside players to join forces. But the regulatory hurdles for clearance are quite high.

In some ways that makes the deal with Just Eat cleaner. Merging with Uber would have required a long slog through Washington for approval. Restaurant ownership is a tough business in the best of times but in a Covid-19 world it has been extremely fragile and gripes about food-delivery services extracting too much money have been growing. Some U.S. cities including New York have issued temporary caps on commission rates.

Where does this leave Uber? Chief Executive Dara Khosrowshahi is making food delivery a cornerstone for strengthening the ride-hailing firm. Uber Eats, whose revenue jumped 53% in the first quarter, is losing money. Morgan Stanley figures it will shed $340 million in EBITDA next year. Finding another partner has just gotten harder. As for Maloney, he has secured access to more capital for Grubhub to compete, but now new parent Just Eat has to take the heat.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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