By Edvard Bruu, Marcus Falck (Stockholm School of Economics), Justin Leung, Harson Lin, Ivan Chung (Hong Kong University of Science and Technology)
Overview of the deal
Acquirer: Uber Technologies Inc
Implied Equity Value: $2.65bn
Total Transaction Size: $2.65bn
Closed date: Estimated 1Q21
Target advisor: JP Morgan Securities LLC
Uber on July 6 announced its acquisition of food delivery service Postmates in a $2.65 billion all-stock deal after its offer to buy Grubhub fell apart amid antitrust scrutiny. Postmates’ app will continue to run separately after the deal but its merchant and delivery network will be merged into Uber’s. This is expected to incur revenue and cost synergies and create the second-largest food delivery service in the US representing 30% of the market share.
The deal, expected to complete by 1Q21, verifies yet again the winner-take-all characteristic of the food delivery industry owing to the similar business model among players and competitive edge of economies of scale, which will be further elaborated throughout this report.
“Uber and Postmates have long shared a belief that platforms like ours can power much more than just food delivery—they can be a hugely important part of local commerce and communities.” Dara Khosrowshahi, Uber CEO
Company Details: Uber Technologies
Uber Technologies, Inc. is a multinational ride-hailing company operating in more than 80 countries worldwide. With 110 million users estimated in 2019, Uber is offering peer-to-peer ridesharing, ride-hailing service, shared electric bikes or scooters, and food delivery service under the name of Uber Eats. Uber Eats currently holds 24% of the US domestic food delivery market.
Founded in: 2009
Headquartered in: San Francisco, California, United States
CEO: Dara Khosrowshah
Number of employees: 26,900
Market Cap: $57.5bn (as of 14/07/2020)
EV: $57bn (as of 14/07/2020)
LTM Revenue: $14.6bn
LTM EBITDA: ($8.2bn)
LTM EV/Revenue: 3.32x
LTM EV/EBITDA: (5.90x)
Company Details: Postmates
Headquartered in San Francisco, Postmates is an American delivery company specialising in handling restaurants-prepared meals and other grocery items. With operations in 2,940 cities in the United States, Postmates is one of the leading on-demand food delivery service companies and takes up 8% of the domestic market share.
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)
LTM EBITDA: ND
LTM EV/EBITDA: x
In the short term, we may see more direct synergies on the revenue side. Despite being a smaller player, Postmates has a solid presence in cities like Los Angeles, Las Vegas, Phoenix and strong relationships with small- and medium-sized local restaurants that Uber Eats was unable to penetrate. Uber has said it will be running Uber Eats and Postmates separately, but users can switch between the two to obtain complementary delivery choices and thus generate cross-selling effects. Executives are also expecting the deal to bring Postmates users to its ride-share business through frequent day-to-day interactions. On the cost side, the merged company could soon cut duplicate administrative, marketing, and tech expenses, estimating to save $200mn/year.
As the COVID-19 pandemic continues to spread worldwide and containment unforeseeable in the near future, acquiring Postmates is also a strategic move aiming to mitigate loss in its ride-share business as people choose to stay at home. Uber said bookings for its Eats division in 2Q19 more than doubled from the previous year while Postmates’ gross orders grew 50% during the same period. Uber is now betting that the food delivery business could help it achieve its “positive EBITDA” target that the company has aimed to achieve for years.
By eliminating a direct rival and becoming the second-largest food delivery service in the US (30% market share), Uber could achieve better pricing power and thus improve its revenues and margins. However, this is rather controversial as DoorDash (45%) and Grubhub (23%) remain strong competitors in the industry.
The current consolidation of the food delivery market indicates that the leading players are aware of the industry’s winner-take-all characteristic. This distinctive trait implies that the largest actor will be difficult to outcompete once the market has matured, due to extensive network effects in regards to customers, restaurants, and couriers. Uber’s acquisition of Postmates can be seen as the American tech giant’s attempt to reach that market-leading position. Even though Uber has announced its intentions to keep running Postmates as a separate service in the short term, it can be assumed that a complete integration of the companies is planned further down the road. Seeing as both Uber Eats and Postmates have the same primary market, North America, substantial cost saving synergies can be reached by joining forces. Not only can couriers be utilized more efficiently by reaching a larger share of the market, but the companies are also able to merge their backend systems and utilize the data of both services to provide customers with a superior delivery service.
Furthermore, the acquisition of Postmates enables Uber to expand the business model of Uber Eats into a full fletched provider of DaaS – Delivery as a Service. This is a business area that Postmates has experimented with, by offering customers deliveries of groceries, electronics, and other products, either separately or in conjunction with food delivery. Uber has been open with its interest in this market and by utilizing and expanding Postmates’ established network, it is plausible that this interest can turn into a fully functional service within the next couple of years. This would add another revenue stream for Uber and divert attention from the company’s core business, their ride-hailing service, that has seen a substantial decline in demand due to COVID-19.
Risks and Uncertainties
Ranked second and fourth in the US market, the merger has struck off heated debates regarding over consolidation, as the deal further slims the oligopoly from four to three players. With their strong presence in cities like Miami, Los Angeles and Phoenix, where the merger gobbles up 78%, 50% and 43% of market share respectively, the deal is currently reviewed by regulatory bodies for ensuring the deal's compliance to anti-trust laws. Initiating an asset sale favouring other competitors is normal for resolving domination in conventional manufacturing sector deals, but the most obvious assets that both companies held are gig workers and restaurant connections, which adds complexity to Uber's post-acquisition work. 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. Uber is in the risk of bearing additional legal obligations in the future, as Uber now owns Postmates. This also proves that Uber would still have to bear the same risk if they successfully acquired Grubhub before acquiring Postmates from the perspective of future antitrust legal obligations.
Both companies have benefited from the pandemic and recorded staggering growth in the past few months. However, Uber is still far from profitable since establishment, with a net loss of $6.3 billion recorded in 2019 and Postmates’ records showed their incompetence in lucrativeness. Worse still, Uber is currently suffering from an 80% drop in demand for its ride-hailing service, which creates risks to its short-term liquidity and long-term profitability. Revealed by Uber’s CEO in March, a drop in their ride-hailing business by 80%, which is consistent with the real case, would leave Uber $4 billion in cash. After settling the $2.65 acquisition cost of the deal, Uber would only have $1.35 billion left under a neutral estimation.
“Over the past eight years we have been focused on a single mission: enable anyone to have anything delivered to them on-demand.” - Postmates co-founder and CEO Bastian Lehmann