Monopoly Threat Weighs on Grubhub Merger, Uber Stock

Uber Technologies (NYSE: UBER) and Grubhub Inc. (NYSE: GRUB) have been the center of attention in the food delivery industry recently. The reason: Uber is looking to acquire Grubhub and roll the business into its Uber Eats service.

It’s no secret that Uber has been losing money with its food delivery service for a long time now. By acquiring Grubhub, Uber is hoping to see synergies that will make this business profitable.

Uber stock has outperformed the S&P 500 and the stock market in general so far in 2020. Uber shares are up about 20% in this time. Grubhub stock has more or less performed in line with Uber year to date.

As it stands, the companies seem to have an agreement for the acquisition, but there may be one sticking point. According to reports over the weekend, Grubhub is requesting that it include a breakup fee, which Uber would pay if government regulators block the deal.

Delivery Fee

Bloomberg news reported that Grubhub wants Uber to commit to a cash payment in the event that regulators block the deal. Government regulators are concerned about the deal, including the status of the workers and fees being charged to restaurants.

Four members of the Senate Judiciary Committee’s antitrust subcommittee last month wrote to the Federal Trade Commission and the Antitrust Division of the Justice Department urging that the merger discussions be closely monitored.

“A merger of Uber Eats and Grubhub would combine two of the three largest food delivery application providers and raise serious competition issues in many markets around the country,” said the letter, which was signed by Senators Amy Klobuchar (D-Minnesota), Patrick Leahy (D-Vermont), Richard Blumenthal (D-Connecticut) and Cory Booker (D-New Jersey).

The senators further noted that the food delivery app business is dominated by just three companies: Grubhub (which also owns Seamless), DoorDash and Uber Eats. According to the letter: “The merger under negotiation would create a sector in which the top two players control 90 percent of sales.”

Monopoly Concerns

The senators’ prime concern is that the merger of Uber and Grubhub would give Uber control over the vast majority of food delivery in the United States. The senators believe that this would result in elevated prices and lower quality of service due to the lack of competition.

The senators noted that the merger’s effect on competition would be felt intensely at the local level. “A combined Uber Eats/Grubhub would control 51 percent of the market in Atlanta, 68 percent in Boston, 60 percent in Chicago, 65 percent in Miami, and 79 percent in New York City,” according to the letter.

Uber’s CEO Dara Khosrowshahi has come out against this directly. He argues that the market is growing so much that there is enough to go around, and doesn’t see any one or two companies dominating 90% of it.

Khosrowshahi has previously pointed out that none of the delivery companies are making any money. Reaching sustainability or the ability to make money, according to Khosrowshahi, would require companies to make 15% of each order’s total in fees, as opposed to the 12% they are currently making. He said the industry could achieve this goal through consolidation, which is what we’re seeing now.

Where Uber Eats Stands

In the first quarter, Uber Eats generated about $820 million in revenues, a year-over-year increase of 53%. Uber’s ride service posted revenues of $2.47 billion, an increase of 2% from last year.

The competition among food delivery companies is tough, and there are no truly high barriers to entry. A local delivery service is definitely capable of competing against Uber or Grubhub, but it is severely outmatched without an app or a following of millions of consumers who use it as a default.

In New York, restaurant owners have filed a class-action lawsuit alleging price gouging during the COVID-19 pandemic. Uber is among the companies accused of fixing prices, which is a violation of federal antitrust law.

Again, this is why senators have been paying close attention to Uber and its acquisition aspirations. If the acquisition of Grubhub moves Uber closer to monopoly status in the delivery industry, then it may be dead in the water.

In seeking a breakup fee, Grubhub is hoping to get some cash whether the deal goes through or not.

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