Jim Cramer Favors Uber-GrubHub Buyout: Is He Right?

Uber-GrubHub consolidation

According to people familiar with the matter, Uber would offer an all-stock deal to GrubHub shareholders—2.15 Uber shares for each GrubHub share. However, Uber has already rejected the proposal. The companies “remain at odds on price,” according to a CNBC report. Barclays said that Uber could pay $75 per share to GrubHub shareholders, according to another CNBC report.

If the deal happens, it would consolidate GrubHub’s food delivery service and Uber’s “Uber Eats” business in the US. However, merging the two major food-delivery apps could draw antitrust scrutiny. Currently, Uber and GrubHub are the second and third largest food-delivery apps in the US in terms of market share. Meanwhile, the merger would give tough competition to rivals like DoorDash and Postmates.

The companies have been experiencing a spike in demand during the coronavirus. Although the companies haven’t agreed on a formal deal, according to Bloomberg, they might reach an agreement this month. Uber was also interested in acquiring DoorDash in the past, but the talks stalled.

Why the deal makes sense

Lately, GrubHub has been struggling with its low-profit margins in a tough competitive environment. The ongoing coronavirus risk has added to the pressure. In the first quarter, the online food-ordering platform reported revenues of $363 million, which rose from $323.8 million in the first quarter of 2019. The revenues were also higher than analysts’ expectation of $358.1 million. However, GrubHub’s active diner growth decreased to 24% in the quarter from 28% in the previous quarter. The company’s daily orders also decreased by 1% YoY. However, GrubHub’s delivery demand spiked 30% in March. People were stuck at home amid the lockdowns and used home-delivery services. The company didn’t provide any guidance for the second quarter. GrubHub’s CEO vowed to spend the profits to drive more business.

Ride-hailing giant Uber also reported its first-quarter results last week. The company reported an adjusted loss of $1.7 per share, while analysts expected a loss of $0.88. The revenue of $3.54 billion also missed analysts’ estimate of $3.5 billion. However, the gross bookings for its food delivery segment, Uber Eats, grew over 50% YoY in the quarter.

In 2020, Uber has plans to lay-off around 3,700 of its employees. Uber CEO Khosrowshahi announced that he won’t take his base salary of around $1 million for the rest of 2020 to save on costs. The company’s management also delayed its plan to turn the company profitable until 2021.

In such a scenario, a deal in the food delivery industry really makes sense. The merger would save on costs and generate cash flows, which are essential to run a business during trying times. I think that Jim Cramer is right—the merger would benefit both companies.