A 5-Star Merger for Two?: Uber hopes to acquire US food delivery start-up Postmates

July 12, 2020

3 min read

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What's going on here?

In an attempt to mitigate its ride share losses, Uber is in talks to buy US food delivery start-up Postmates for an estimated $2.6bn.

What does this mean?

The COVID-19 pandemic, and more specifically the lockdown, has had a huge impact on Uber’s business, which is highlighted by a $2.94bn loss in Q1 and the dismissal of thousands of employees.

Although Uber raised over $8bn with its IPO in May 2019, the company has never turned a profit, with it suffering a $8.5bn loss in the same year as this IPO. Uber’s margins were made even worse by a recent Californian state statute (Assembly Bill 5). Seeking to clarify the definition surrounding independent contractors, this statute gave Uber’s drivers the right to holiday pay and sick leave which has increased Uber’s costs, pushing the possibility of becoming profitable even further away.

Although Uber’s ride-hailing business felt the negative effects of COVID-19, Uber’s food-delivery service UberEats, has seen sales boom 54% during the pandemic. Uber CEO Dara Khosrowshahi hopes to use this as an opportunity to “refocus (the company’s) efforts”, and consolidating UberEats’ US business could be one way to do so.

What's the big picture effect?

The food-delivery sector has aggressive competition and therefore expensive marketing campaigns which can make thin profit turn to no profit. But Los Angeles investment firm Wedbush Securities estimates that up to 25% of UberEats’ and Postmates’ costs could be cut with the elimination of overlap. This would ultimately improve the merged company’s bottom line, helping Postmates expand its Los Angeles’ dominance to other cities and Uber cover some of the losses incurred by its main ride-hailing business.

Postmates was not Uber’s first choice, with its recent attempts to acquire Chicago-based Grubhub for £5.75bn dashed by antitrust issues. UberEats-Grubhub would have had 45% of the market share (matching industry leader Doordash’s 45%), but alongside difficulties agreeing to a price, the years’ worth of potential antitrust scrutiny would have hampered Uber’s plans to become profitable by the end of 2020. Whereas Uber’s acquisition of Postmates is unlikely to face the same issues, as the combined market share is 30% (22% and 7% respectively). Coincidentally, Uber is not Postmates’ only choice either, with the company considering an initial public offering alongside the plan to merge (this is known as a dual-track process). If public investment forecasts a more beneficial deal, Uber will be left high and dry once again. 

Just Eat Takeaway.com capitalised on Uber’s antitrust concerns and acquired Grubhub, giving the UK-Dutch company a foothold in the US market. This is not Just Eat Takeaway.com’s first big move, with the two companies recently merging for £5.9bn. This highlights the fact that many food-delivery companies have identified M&A as a strategy to remain competitive. Another example is Amazon’s £442m investment in Deliveroo. It is also worth noting that UberEats-Grubhub was not the first time a merger faced antitrust challenges. Both Just Eat-Takeaway.com and Amazon-Deliveroo were subject to intense scrutiny by the UK’s Competitions and Markets Authority before eventually being approved. 

 In consideration of Khosrowshahi’s recent statement that Uber would withdraw from markets where it “struggled to make a profit”, if its plan to acquire Postmates fails, it is not unlikely that it will exit the US market. But with Uber’s strategy of “growth at any cost” seemingly a thing of the past, and the possibility of profitability by the end of the year ever more likely, now might not be a bad time to invest.

Report written by Keir Galloway Throssell

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