By Zaid Dudhniwala, BSc Economics @LSE
OVERVIEW OF THE ACQUISITION:
- Acquirer: Uber
- Target: Postmates
- Estimated value: $2.65B
- Financing: All-stock transaction
- Announcement Date: 06/07/2020
- Acquirer Advisors: Legal: Wachtell, Lipton, Rosen & Katz
- Target Advisors: Financial: J.P. Morgan Securities LLC, Legal: Latham & Watkins LLP
Uber looks to branch out their UberEats franchise further through the all-stock acquisition of Postmates for $2.65B. After having lost out on Grubhub, which was recently acquired by the recently formed giant that is Just Eat Takeaway.com, Uber looked to gain some form of constellation. This acquisition has now increased Uber’s market share to 37% in the USA, second only to Doordash which has 45% of this growing market.
The $2.65B price tag implies a small yet considerate premium of around 10% on the $2.4B valuation Postmates received in private investment last September. A dampened valuation now may have come as a result of the Covid-19 pandemic, as the M&A landscape as a whole looks to adjust valuations and premiums in line with the crisis caused by the pandemic.
This deal will keep the Postmates brand and app as they are, however both firms will benefit from merging some of the tech and delivery operations behind the scenes, for example, by having drivers delivering orders for both businesses. Although UberEats grew by 52% last quarter, despite Covid-19, Uber still operated on a loss of $3B last quarter. This cost-cutting and market-share boosting expansion looks to stimulate profits for a company that has never done so to date.
COMPANY DETAILS (Uber):
Uber is the world’s largest taxi company, providing an accessible and market-leading platform for drivers to sign-up, and customers to safely taxi from A to B. Uber has branched out into other businesses too, as they reached the limit of their global expansion operating in over 900 cities in 80+ countries, forming UberEats, a food delivery business. UberEats has had stiff competition, but still has decent global market share, with roughly 24% of the US market. It also follows their easy-to-use app interface, making both apps essential on any smartphone in the West today.
Despite Uber’s strong position, it has been suffering a lot recently. Uber has struggled to make profits in their 10+ year history, with $3 billion lost in the last quarter due to Covid-19 effects on their business. Competition is slowly catching up, with Uber’s international dominance being contested by local leaders. A good example can be seen in how Deliveroo is challenging UberEats in the UK, and how Ola is gaining more market share than Uber in South Asia, specifically in India. They urgently need to change their strategy to sustain their position in the industry.
- Founded in: 2009
- Headquartered in: San Francisco, California, United States
- CEO: Dara Khosrowshahi
- Number of Employees: 22,000
- Market Cap: $56.39B
- EV: $53B
- LTM Revenue: $14.59B
- LTM EBITDA: $-8.22B
- EV/ LTM Revenue: 3.63x
- EV/ LTM EBITDA: -6.46x
COMPANY DETAILS (Postmates):
Postmates is a smaller, more specialised company, with a focus on delivering restaurant meals, groceries, alcohol and a whole host of amenities. Postmates operates in nearly 3000 US cities, and is focused on the American market. What sets them apart is the accessibility of the app. It is claimed to be more consumer-friendly and reliable than UberEats and larger competitors like Doordash. Postmates has creative features like “party delivery” to accommodate different consumer demands. The platform is set up for expansion for the delivery of most legal goods sold in the states that do not require licenses.
Postmates is privately owned, being recently valued at around $2.4B after an investment of $225M in the business last September. The company looks to take advantage of the Covid-19 situation and benefit from the increased consumer market coming out of the crisis.
- Founded in: 2011
- Headquartered in: San Francisco, California, United States
- CEO: Bastian Lehmann
- Number of Employees: 5,400
- Market Cap: n/a
- EV: $2.4B (09/2019)
- LTM Revenue: $1.3B
- LTM EBITDA: n/a
- EV/ LTM Revenue: 1.85x
- EV/ LTM EBITDA: n/a
STRATEGIC RATIONALE:
Losing out on Grubhub due to competition regulator restrictions and incompetencies in finalising a deal, Uber looks to boost their market share to keep their UberEats business above that of Grubhub, which is now part of JustEat Takeaway.com. This deal boosts Uber’s market share to 37%, roughly 13% more than what Grubhub has, so even if the latter experiences greater investment and synergies, it will still be below market leader DoorDash & UberEats. Both Uber and Postmates benefit from a larger customer base not only in terms of revenue, but also with customer data and geographical expansion.
By synergising behind the scenes, both companies can sustain their revenue in the market, whilst cutting costs through synergies, boosting both companies’ lack-lustre profits. For Uber, Postmates seems like a great opportunity to look into delivery of more than just of Food and Alcohol, they may look to expand out further into the grocery delivery market in the US through this deal. For Postmates, Uber’s large customer base provides a great avenue for additional revenue, providing them grocery services and not just food delivery. They also benefit from the mass investments that Uber draws, and can benefit from greater investor confidence by possibly trading publicly in the future via Uber.
Since both companies retain their respective original brands, such a deal is great to create synergies behind the scene which would help both companies. A strong rationale is present for this deal.
RISKS AND UNCERTAINTIES:
Uber’s lacklustre performance last quarter may be an indication that they can not increase their market share further, and they may be experiencing a shrinking customer base. If both companies are already quite efficient, operating in the same original names may not necessarily maximise synergies across both businesses.
DoorDash’s dominance also remains untested in the industry as a result, due to them still having the largest market share. With possible greater financing for Grubhub via their recent deal, it will be a challenge for Uber, even with this deal, to sustain their market share and even get close to challenging DoorDash. It would not be a surprise if Uber operates with losses for more quarters coming forward.
Postmates USP of providing a personalised service could also be lost if Uber looks to upscale the business too quickly, especially if it goes global. This may offset their customer base, and could be risky for the business.
OUR VIEW:
From an outsider’s perspective, it is clear that Uber needed some kind of kickstart to bring back their business from the depths of the Covid-19 pandemic, and such an acquisition is a step in the right direction. Despite the competitive food delivery market, such an acquisition will create synergies for both companies involved, which should look beneficial to boosting market share and profits. A small premium of 10% makes sense in the current economic climate, however the potential for Uber to grow further from here is immense, and is hence a valid justification of this move for both firms involved who are collectively trying to use substantial market share to not only boost profits, but also to attract further investment.
