Parsing Yelp’s Spin-Off of Eat24
Yelp divesting Eat24
Yelp (YELP) is spinning off its food-ordering service Eat24. It’s selling the business to GrubHub (GRUB), which already owns a number of restaurant-oriented apps (applications) such as Seamless and MenuPages. Yelp subscribers could continue to use Eat24 even after the sale of the service.
In deciding to divest Eat24, Yelp may have just admitted the difficulty of operating in the food-ordering and meal-delivery market. Several obituaries have been written in this space, and many of the survivors are struggling as competition heats up. Let’s look at meal-kit company Blue Apron (APRN), for instance. This company went public earlier this summer, and the stock has known no honeymoon, with it hugging a 52-week low.
Operational challenges and tough competition are rattling many food-delivery companies. Deep-pocket companies such as Amazon (AMZN) and Facebook (FB) are also eyeing the food-ordering and food-delivery market.
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Eat24 is fetching double the investment
Despite the sale of Eat24 appearing to highlight Yelp’s struggles in the food-ordering market, it’s hard to ignore the gains the company is making in the transaction. Yelp acquired Eat24 in 2015 for $134.0 million, and now it’s selling it for $287.5 million in an all-cash transaction. That implies that Yelp is getting more than double what it invested in Eat24 just two years down the line.
Opportunity to cut costs
Besides the anticipated top and bottom boost from the sale of Eat24, spinning off the business could also lift some of the cost burdens from Yelp’s shoulders. Between 2015 and 2016, Yelp’s operating expenses spiked about $462.5 million.
With more cost-savings, Yelp could return more value to shareholders. The company recently announced a $200.0 million stock repurchase program.