Just Eat Takeaway.com (LSE:JET) told investors that it intends to buy US-based GrubHub in an all-stock deal yesterday. Mergers tend to stir up a lot of excitement, but I am going to spoil the party and say that I am not going to be buying Just Eat. Let me explain why.
An appetite for mergers
The tie-up between Just Eat (formed from last year’s merger between Just Eat and Takeaway.Com) and GrubHub should deliver the largest online food delivery company outside China. In 2019, GrubHub and Just Eat processed 593m orders for 70m customers globally. However, the claim that the combined company will also be profitable does not convince me.
Just Eat has lost money in each of the last five reported fiscal years. GrubHub was profitable from 2015 to 2018 but swung to a loss in 2019. Using the exchange rate for the end of 2019 of one euro for every 1.12 US dollars, GrubHub’s and Just Eat’s 2019 income statements can be combined. The result is $1,778m in revenue and an operating loss of $105m.
Of course, it is true that this is a naive way of analysing the potential of the combined company. For one thing, it ignores any cost savings resulting from merging. However, both companies were already facing increasing costs and losses despite rising revenues. The synergies from the combination will have to be large to get back to an operating profit.
The deal seems to be motivated by a desire, on Just Eat’s part, to get in ahead of Uber acquiring GrubHub for its Uber Eats business. Now, there may be some pricing power that Just Eat can wield from being the biggest platform in town. That might be a path to cost reduction, but it’s worth pointing out that Just Eat and GrubHub operate in the main on two different continents.
Problems in the network
A commonly cited path to profit for companies with a tech element is to rapidly add users, which increases the value of the service to them at an increasing rate. Growing like this can be accompanied by a smaller proportional cost of serving the users. Still, it relies on having large network effects. Just Eat’s service only becomes more valuable if another customer or restaurant signs up in a local and limited sense. A user in North London won’t care much if a restaurant in South London signs up and vice versa. They won’t care at all about GrubHub’s offerings across the Atlantic.
Furthermore, the online food delivery service seems to be reliant on transitory populations that live in cities. Suburb dwellers probably know the restaurants in their area, having lived there for years, and don’t need to find them. Most of the restaurants signed up to Just Eat receive orders but still deliver the meals themselves. For regular customers of those restaurants, ordering by phone, foot, or website does away with the need for Just Eat.
The merger of Just Eat and GrubHub is unlikely to run into any competition or anti-trust hurdles because this is not a strategic acquisition of a domestic competitor. However, what I would do now is not buy shares in Just Eat. The current price of about 7,500p is a little too rich for my blood, whether the merger happens or not.
