By Mateo Luca-Lion and Yash Madan (University of St Andrews)
Overview of the deal
Acquirer: Uber Technologies Inc
Target: Postmates
Estimated value: 2.65 Billion USD (all stock)
Announcement date: July 6, 2020
Acquirer Advisors, Legal: Latham & Watkins
Target Advisors, Legal: Wachtell, Lipton, Rosen & Katz
Target Advisors, Financial: J.P. Morgan
Consolidation is the natural progression of the third-party delivery space. After a failed deal with Uber, Grubhub merged with European food delivery giant Just Eat Takeaway in a deal for $7.3 billion. On the heels of this failed deal, Uber went on to acquire Postmates in a $2.65 billion all-stock deal. This is expected to bring about revenue and cost synergies and create the second-largest food delivery service in the US representing a third of the market share.
Thus, food delivery has become quite commoditized. The consolidation taking place is a natural evolution as companies work to establish an improved economic structure. With the Postmates acquisition, UberEats immediately moves into a strong position. Postmates and UberEats will directly synergies
individual customer data but maintain individual applications. The vast expanse of data will facilitate UberEats ability to create more relevant services as they merge the Postmates operations into UberEats. Data will play a vital role in engaging their customers on an individual basis and further grow the market.
The combination of data prevalence and market dominance will allow both entities to offer complementary services and to adjust strategies to optimize margin structure.
“Combination of platforms to provide more choice and convenience for consumers, increased demand and tailored technology offerings for restaurants, and new income opportunities for delivery people”
Company Details: Uber Technologies
Uber Technologies, Inc. is a globally operated ride-hailing company with 110 million users (2019 estimate). One of the largest providers in the gig economy, Uber offers vehicles for hire, food delivery (Uber Eats), package delivery, couriers, freight transportation, and through a partnership with Lime, electric bicycle and motorized scooter rental. Uber Eats currently holds 24% market share in the US
domestic food delivery market.
Founded in: 2009
Headquartered in: San Francisco
President and CEO: Dara Khosrowshahi
Number of employees: 26,900
Market Cap: 53.4 Billion USD
LTM Revenue: 14.15 Billion USD
LTM EBITDA: ($8.2) Billion USD
LTM EV/Revenue: 3.32x
LTM EV/EBITDA: 5.90x
Company Details: Postmates
Postmate is an American third-party delivery company offering restaurant prepared services and additional grocery items. Operating in 2,940 locations in the United States, Postmates is a leading on-demand food delivery service provider and takes up 8% of the domestic market share. The company is headquartered in San Francisco.
Founded in: 2011
Headquartered in: San Francisco, California, United States
CEO: Bastian Lehman
Number of employees: 5,341
Total Funding: $903mn (as of 19/09/2019)
EV: $2.3bn (as of 19/09/2019)
Revenue: $1.85bn
EV/Revenue: 1.26x
Short-term consequences
Simple market analysis highlights that Uber may have overpaid for this deal. Market share means everything in this industry. In June, Dutch food-delivery giant Just Eat Takeaway.com NV paid $7.3 billion for Grubhub which holds a 32% market share. As Postmates’s market share is 10%, simple analytics puts forward the idea that the deal is worth no more than $2.3 billion (Postmates should garner 31% of Grubhub’s price).
This leads to the conclusion that Uber is overpaying by at least $350 million for Postmates which decided it would be better off betting on Uber stock which trades more than 20% below its May 2019 IPO price than going it alone in the IPO market.
Doordash and Grubhub still remain as strong competition to Uber and Postmates with a respective 45% and 23% control over the market, however with Uber’s acquisition could result in better pricing power further leading to an increase in revenue and margins. Uber disclosed that bookings for its UberEats division in 2Q19 more than doubled while Postmates’ gross order grew 50% in the same time period. This could help Uber reach one of its big targets, to have a positive EBITDA, something they have been trying to achieve for years.
With the Covid-19 pandemic, there has been much uncertainty about containment in the near future. Acquiring Postmates is a strategic move in the short term as it mitigates losses from the ridesharing aspect of the company as people stay home and continue to be wary about the pandemic. Uber mentioned that it will be running Postmates and Uber Eats separately, however, users can switch between both to have complimentary delivery selections resulting in cross-selling effects.
This deal also will have negative reactions from the gig workers who underpin the ride-hailing and food-delivery business. It will amplify Uber's ability to suppress worker pay. Drivers and food couriers receive a share of the ride and meal-order fees charged by the app-based companies, which also take a hefty cut. Uber just spent billions on Postmates while continuing to pay workers a pittance which could potentially result in employee backlash.
Long-term upsides
With this deal, Uber and Postmates will have a 37% combined market share, right behind DoorDash with 44%. The current position of the food delivery market indicates a winner takes all culture in the long term implying that the leader in this industry will be extremely difficult to compete with once the market has
matured. This is due to the extensive customer, restaurant, and courier network effects. This acquisition can be interpreted as Uber’s attempt to become the giant in this industry and lead the market. Uber and Postmates currently run on separate services, however, with all this being said, it would not be a surprise if they integrated over the coming years.
With this business model, service providers are not employees of the business (price-takers). There is a positive cost structure (the majority of costs are variable in nature) as well as low mandatory CapEx. This model can also use the B2B model as well as the B2C model which is notable as worldwide B2B marketplaces sales could reach £3.6 trillion by 2024 and outgrow the B2C sector. All these factors prove beneficial in the long term.
Risks and uncertainties
Consolidating two of the US market's largest players, the merger has initiated the legal debate, as the deal further slims the oligopoly from four to three players. With a strong presence in critical locations like Miami, Los Angeles, and Phoenix, the merger will instigate control of up 78%, 50%, and 43% of market share; the deal is currently being reviewed by regulatory bodies to ensure the deal's compliance with antitrust laws. Instigating an asset sale favoring competitors is typical for resolving domination in conventional manufacturing sector deals. However, the reality is that both companies hold gig workers and restaurant connections as "assets," which adds complexity to Uber's post-acquisition process. A class-action lawsuit was filed in Manhattan's federal court towards Uber, Grubhub, and Postmates for negotiating contracts with fast-food chains by offering commissions in exchange for being their sole service provider.
Third-party food delivery is one of the few industries that benefited from the pandemic, and both Postmates and Ubereats recorded immense growth in the past few months. However, Uber is still far from profitable, with a net loss of $6.3 billion listed in 2019, and Postmates' records showed incompetence inability to remain lucrative. Furthermore, Uber is currently suffering from a 75% drop in demand for its ride-hailing service, which creates short-term liquidity risk and potentially puts long-term profitability in the red. Early in the year, Uber CEO revealed that such a situation could leave Uber with only $4 billion in cash. Thus, after settling the $2.65 acquisition, Uber would only have $1.35 billion left under an
unbiased estimation.
Additionally, worth noting is the pressure that restaurants, the underlying service provider, currently face. Running a restaurant has always been difficult, but economies of scale have pushed down on the market, making it even tougher to succeed. The best locations are controlled by real estate trusts renting rents, and credit card companies skim 3 percent right off every check.
Now the four big order-and-delivery apps capture anywhere from 15 to 40 percent of every bill. This merger leaves only three firms controlling 98 percent of a rapidly growing market and giving them the power to raise commissions further. Already, Uber, Grubhub, and Postmates have developed partnerships
with large national fast-food chains that offer lower fees and commissions in return for being the sole service provider.
Additionally, myriad standard contracts used by such firms have clauses that prohibit client restaurants from offering discounted prices to customers of other services, or even customers who dine in the restaurant or place and pick up their takeout orders. The outcome of such contract provisions is to reduce competition; the fact that restaurants have no choice but to accept them highlights the fact that these apps will ultimately lead to a fundamental change in the modern restaurant's operation, for better or worse.