The food fight is intensifying in the delivery services industry.
Uber Technologies is in talks to sell its Uber Eats business in India to Zomato, a food-delivery services based in the country, according to a New York Times report Monday. Delivery Hero announced December 13 that it’s buying South Korean delivery app company Woowa Brothers for $4 billion. And Netherlands-based Prosus has made a hostile bid for Just Eat, upping its offering price last week.
Just Eat had agreed in July to merge with Takeaway.com to create what the companies said would be one of the largest food delivery companies in the world. The board of Just Eat has recommended that shareholders reject the revised offer from Prosus. In yet another deal, DoorDash said in August that it agreed to acquire Caviar for $410 million in cash and DoorDash preferred stock.
This flurry of activity is not taking some investors by surprise, including the folks at Light Street. Institutional Investor earlier reported that Light Street devoted a large portion of its investor letter for the fourth quarter of 2018 to the case for consolidation in the online delivery business.
At the time, Light Street said the industry was still in the first phase of market consolidation among global food delivery businesses. “We expect the consolidation phase to transition into full scale M&A, as food delivery companies merge with their competitors,” the firm predicted.
Morgan Stanley still thinks consolidation is at an early stage. In a 66-page report published on November 12, the investment bank asserted that “the online food runway is long,” noting that there is just a 6 percent penetration. The firm estimates an 18 percent compounded annual growth rate for the online food delivery business through 2025. “Consolidation/rationalization are key” in this large market, which has seen cash-burning competition, according to Morgan Stanley.
The bank sees Uber as a winner and challenges for GrubHub.
“Near-term signals are mixed, with the latest commentary from UBER signaling a path towards a more rational environment is ahead and GRUB seemingly signaling the opposite,” Morgan Stanley stated in its November 12 report. It also noted that GrubHub “profitability [is] getting worse.”
Morgan Stanley valued Uber at $61 billon in a December 16 research note. The bank sees three reasons the potential sale of Uber Eats India would be positive for the company.
For one, it would be an important first step in Uber delivering on its recent pledge to “rationalize the global Uber Eats portfolio and exit/partner in markets where they are not in a position to be number 1 or 2 within the next 12 - 18 months,” the bank explained. Morgan Stanley also believes an India deal would improve company-wide profitability since it notes this business generated $300 million to $400 million of annual EBITDA losses. The third reason is that Uber could end up with a minority stake in what in one of the leaders of the fast-growing, consolidating Indian online food delivery industry.
“As we have seen with Uber’s similar strategy around Rides in China, Russia, and SE Asia, these investments can lead to significant value creation,” Morgan Stanley said.
Morgan Stanley has designated Uber a top 2020 pick with a price target of $55, which it says is based on a sum-of-the-parts analysis. Shares of Uber closed at $29.75 on Tuesday, down 1 percent.
In the third quarter, at least 54 hedge funds held a position in Uber, a net decline of 15 from the prior three months, according to Novus. One of its largest investors is Viking Global Investors, though the company is not one of its top 10 positions. Uber was a top-five holding of Valiant Capital Management and Valinor Management.
Viking is also an investor in GrubHub, according to third quarter regulatory filings. Morgan Stanley has a $33 price target for GrubHub based on its discounted cash flow analysis. Shares of the company closed at $45.79 Tuesday, down from a peak of more than $146 in September 2018.
Investors seem a little leery about the recent rally in shares of GrubHub, which went public in April 2014 at $26. More than 22 percent of its float is currently sold short, up from 17 percent in March, according to S3 Analytics.
