(Bloomberg Opinion) -- For Uber Technologies Inc., the logic of gobbling up food-delivery rival Grubhub Inc. seemed pretty straightforward: reduce the number of competitors, making it easier to charge higher prices to diners and earn more commission from restaurants. The rationale isn’t so clear cut for Dutch deliverer Just Eat Takeaway.com NV, which leapfrogged Uber to announce on Wednesday that it was acquiring Grubhub in a $7.3 billion all-share deal.
Unlike Uber, Just Eat Takeaway isn’t present in the U.S., where the main rivals are Grubhub, Uber Eats and DoorDash Inc., with the startup Postmates Inc. a distant fourth. That highly competitive landscape won’t change with an overseas purchase of Grubhub, which may explain why investors initially found the idea of such a deal unpalatable. Just Eat Takeaway shares fell as much 19% after news of the potential tie-up was first reported by the Wall Street Journal. That’s equivalent to some 2 billion euros ($2.3 billion) of value.
But the lack of value creation discerned by the buyer’s shareholders is also the same reason that regulators may look upon a deal more favorably than they would an Uber-Grubhub combination. What is bad for investors is good for customers, who will benefit from any price war. This is doubly bad news for Uber: If an existing American rival were the acquirer, at least it would reduce the number of competitors.
The deal is a gamble on the operational nous of Jitse Groen, chief executive officer of the acquirer. He has an impressive track record, expanding a Netherlands-focused operation with revenue of 23 million euros in 2013 into a pan-European giant with sales topping 1.2 billion euros last year.
But he has also only just wrapped up the 6 billion-pound ($7.7 billion) acquisition of Britain’s Just Eat Plc. Like the Grubhub deal, it was an all-share transaction sold to investors on the basis of Groen’s operational acumen. By giving Just Eat shareholders a stake in the new venture, ran the argument, they’d benefit from the value that he and his team would generate once they got their teeth into the U.K. company.
That will be a harder case to make to U.S. investors, where fierce price wars have made market consolidation look like the only way for food delivery providers to improve profit. Uber Eats has lost $2.2 billion on an adjusted Ebitda basis, a measure of profit, in the past two years. Grubhub has seen its Ebitda margin fall from a 2014 peak of 28% of revenue to 0.2% in the three months through March, according to data compiled by Bloomberg.
That declining profitability is largely because of Grubhub’s changing business model. Historically, it operated purely as a marketplace — connecting diners with restaurants, which delivered the food. That differed from the approach favored by Uber Eats, DoorDash and Postmates, who operated their own fleets of deliverers. The marketplace approach, with its lower costs, was much more profitable, but it made it harder to attract chains such as McDonald’s Corp., who were wary about taking on the significant expense of operating a delivery network. So Grubhub is adding its own deliverers — perhaps 30% of revenue now comes from its own delivery network. This will probably increase to 45% by the end of the year, according to Bloomberg Intelligence analyst Mandeep Singh.
Groen is an unashamed proponent of the marketplace model. Don’t be surprised if he pedals back Grubhub’s delivery ambitions. But he faces a daunting task of integrating two acquisitions, where both targets are larger than the original Takeaway.com, in two of the most competitive food delivery markets in the world. He might be about to bite off more than he can chew.
(This column was updated to show that Just Eat Takeaway’s deal for Grubhub was announced.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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