Image by Hieu Vu Minh

Reports

  • Industrials Team

Uber acquires Postmates in $2.6 Billion deal

By: John Schleider, David Xie Shi Jie, Martin Ratchev, Zain Haji


Deal overview


On December 1, 2020, Uber officially acquired Postmates in a $2.65 billion deal that was first announced in July. The Uber Eats and Postmates apps will continue to run separately though the two companies have begun integrating U.S. operations. Uber announced its all-stock purchase of Postmates in July, beating out two unnamed acquisition companies that had made offers for the company. The deal is expected to incur revenue and cost synergies and create one of the largest food delivery services in the US representing 30% of the market share, second only to DoorDash. Completion is expected by Q1 of 2021.


Company Details: Uber


Headquarters: San Francisco, California

President/CEO: Data Khosrowshahi

Number of employees: 21,600

Market capitalisation: $92.6 Billion

EV: $96.6 Billion

LTM Revenue: $12.98 Billion

LTM EBITDA: $(3.74) Billion

LTM EV/Revenue: 7.45x

LTM EV/EBITDA: (25.8)x



Company Details: Postmates


Headquarters: San Francisco, California

President/CEO: Bastian Lehmann

Number of employees: 5300

LTM Revenue: $537.8 Million

LTM EBITDA: $(222.2) Million

Advisor: JP Morgan Securities LLC


Background


Uber, the ride hailing and food delivery disruptor of Silicon Valley, successfully closed its deal with Postmates this month. The deal had been announced in July, after it lost to Europe’s Just Eat Takeaway in its bid for Grubhub in June. Last year it held failed merger talks with DoorDash which were sparked by a push from their mutual investor, SoftBank.


Uber expects this deal to expand its food delivery business in a time where it’s been becoming ever more essential to everyday life. Bookings on Uber Eats have more than doubled this year, according to Dara Khosrowshahi, Uber’s chief executive.


But the Uber Eats + Postmates combo will not be the largest food delivery service in the United States. That title goes to DoorDash, which is expected to maintain 45% market share, compared to Uber Eats and Postmates’ combined 37%. Postmates alone had a market share of 8%. Postmates and Uber are strong in Los Angeles, Miami, and Phoenix, while DoorDash succeeds in New York, Chicago, and San Francisco.


The past several years has seen pressure mount on food delivery companies to consolidate and rein in loss-making operations. Uber, after a less than stellar IPO in 2019, has only just now begun to provide a return to investors, albeit in the form of a price gain. Uber’s financials are deep in the red, with earnings per share at $(0.62) according to its most recent quarterly report. The bread and butter of the firm remains its ride hailing business, which has been harmed severely by the pandemic--Uber has seen a 35% decrease in bookings since the pandemic reached the US in March. This has pushed Uber to diversify and expand in divisions like its food delivery business and divest and cut losses in others, like Uber Freight, of which Uber sold a $500 million share to outside investors.


The food delivery industry will likely remain competitive during and after the pandemic, but Khosrowshahi said “It’s a big enough market, and there is room for three players to be profitable and to do very well. We like our position. We’re never satisfied, but we think that this Postmates deal gets us stronger in the US.”



Synergies


The acquisition of Postmates is a strategic move by Uber to accelerate its path to profitability. Since both companies offer food delivery services, the complementary assets of both will strengthen the combined company. Uber estimates the acquisition to generate cost synergies of $200 Million just 1 year after the close. Due to the pandemic and the pursuant lockdowns, the new way of dining out for most individuals is through food delivery apps like Uber Eats and Postmates. The shift in consumer habits will remain indefinitely as ordering food and trying out restaurants has become the norm for some individuals. The combination positions Uber to compete in an industry that struggles with cash flows.


The acquisition will see Uber Eats’ partnered restaurants increased from 400 thousand to 515 thousand. Postmates also provides additional technologies that facilitate delivery for non-partnered restaurants. Additionally, Postmates also offers industry-leading courier efficiency of nearly 3 trips per hour in strategic markets. The onboarding of such technologies combines Uber’s global scale and Postmates’ local category strengths to accelerate operational efficiency, paving its way to profitability.


Externally, the acquisition will see both consumers and restaurants benefitting significantly. Consumers are presented with more choices at lower prices, and restaurants will face an increase in demand, reducing transaction costs. Uber expects this to increase online delivery penetration from 9% currently to 13% by 2025.



Concluding remarks


There are many risks posed to Uber by this acquisition, largely stemming from the underlying business model. First, delivery contractors or consumers from Postmates might not be happy with Uber and could move to other platforms. This would harm Uber greatly because the industry relies on the networking effect, and any shift to another provider would setback Uber in certain cities. Second, as costs for running the platform are largely variable costs, an increase in volume might not lead to increased profits. In fact, as Uber already subsidizes the service, the acquisition could lead to larger losses. Uber will have to manage these risks and others in the coming months as Postmates is integrated into the platform.


Food delivery apps have grown significantly in recent years, but, due to the similarity of services in this sector, is very congested and there is pressure to keep fees low. It seemsto prosper in this market requires substantial market share. This is evidenced by Just Eat’s $7.3 billion acquisition of Grubhub. The Postmates deal will leave Uber with a 37% share of food delivery sales in the US. Uber has been struggling with the pandemic, but the acquisition of Postmates will further expand its food-delivery sector even as its ride-hailing service struggles.



70 views0 comments