Uber bets on delivery with $ 2.65 billion in the acquisition of Postmates as transportation suffers

In the race to gain a competitive advantage in the burgeoning food delivery business, major players are dividing the map of the United States.

UBER from Uber Technology Inc.,
+ 5.99%
intention to acquire privately owned Postmates Inc. for $ 2.65 billion after its failed offer by Grubhub Inc. GRUB,
+ 4.42%
It is a specific case.

See also: Uber to buy Postmates for $ 2.65 billion: reports

The acquisition would help Uber Eats gain ground against DoorDash Inc., the current market leader in the US, through Postmates’ strong sales in Los Angeles, Las Vegas, Phoenix, San Diego, and Miami. DoorDash remains the dominant player in New York, where it controls more than half of the local market, and in San Francisco. Grubhub, gobbled up by Europe’s JustEat Takeaway.com for $ 7.3 billion in June, is well established in the Midwest.

“We always admired Postmates, reluctantly, from afar, as he was a competitor who could compete aggressively and be a leader in some very important markets with a much smaller capital base than much of his competition, including ourselves,” he said. Uber chief executive Dara Khosrowshahi in a conference call Monday to discuss the deal.

A merged Uber-Postmates would control approximately 37% of the domestic market, compared to 45% for DoorDash, according to data from Edison Trends. The presence of the mates of post has diminished in front of the fulminating competition of the competitors with deeper pockets. In June, it had a market share of approximately 8%.

Market consolidation has been inevitable as the coronavirus pandemic accelerates public adoption of food delivery, and companies like Uber diversify their businesses amid a massive drop in transportation revenue.

Land grabbing was necessary in the United States, says Forrester analyst Sucharita Kodali, because the European market is already consolidated. In April, Amazon.com Inc. AMZN,
+ 5.76%
received provisional approval of its $ 575 million investment in UK startup Deliveroo.

Wall Street sincerely applauded Uber’s move, sending its shares as high as 5% in afternoon trading. Grubhub shares are up 2%.

Uber, which announced 3,000 additional layoffs after an 80% drop in travel volume in April, marked a major turnaround in food delivery. Gross reserves for its Eats business increased 52% year-over-year in the first quarter. (Uber Eats bookings more than doubled in the second quarter, Khosrowshahi said Monday.)

“At a time when our Rides business has dropped significantly due to the shelter in place, our Eats business is increasing,” Khosrowshahi said in the company’s earnings call in early May.

See also: Uber loses nearly $ 3 billion in three months, but stocks recover after hours

Uber, which has been searching under the hood at various food delivery companies for over a year, initially set its sights on Grubhub. But neither side could agree to a sale price, and the combined operation would surely have faced antitrust scrutiny as the undisputed market leader.

At the time, Wedbush Securities analyst Ygal Arounian said any Grubhub buyer would acquire a market share in New York, Boston and Chicago “at a premium, to speed up rationalization through market share dominance” .

Read more: Opinion: Uber plus Grubhub called ‘a new low level of pandemic speculation’, and that’s not the only problem

Postmates, which has flirted with an IPO, should go a long way toward helping Uber expand delivery to more groceries and other small goods, according to Uber. Postmates posted $ 107 million in revenue of $ 643 million in gross reserves in the first quarter of this year, according to a presentation during Monday’s acquisition announcement.

Postmates, who is the clear No. 4 player behind DoorDash, Uber Eats and Grubhub, would be both a defensive and offensive acquisition in the food delivery space for Uber at one point as its core travel-sharing business sees high winds in against in this COVID -19 pandemic, ”Wedbush analyst Dan Ives said in a note Monday.

For consumers, ultimately, consolidation could lead to more efficient delivery systems at lower costs, says Rebecca Allensworth, a law professor at Vanderbilt University.