NEW YORK (Reuters Breakingviews) - The meal delivery crowd is ripe for M&A takeout. Americans are ordering more food at home, but too many well-funded companies are fighting to deliver it. Small firms like Postmates should sell. The likes of Uber Technologies or DoorDash can afford to pay a premium to keep it out of the hands of rivals, and increase their odds of survival.
Bringing meals to homebodies is a booming business. Uber Eats, a unit of the ride-hailing app, booked over $3 billion in the first quarter, more than double what it did a year ago. Yet frightful competition has put margins on a diet. The amount Uber Eats receives as revenue, after subtracting what drivers and restaurants keep, has steadily fallen, and was only about 10% of bookings in 2018.
That’s why delivery companies are losing money overall. Backers hope size will deliver efficiency – and the surviving firm, or firms, will be able to cut back on hefty customer acquisition spending and drive margins higher. That gives an edge to players like $74 billion Uber and DoorDash, which was valued at $12.6 billion in a funding round earlier this year.
The eventual profits may not justify those valuations. But that’s all the more reason why Postmates’ decision to consider a sale, according to Recode, makes sense. The firm is tiny, with a value of less than $2 billion in its latest funding round. It has only about 10% of the U.S. market, according to research outfit Second Measure, but does over a third of all meal deliveries in Los Angeles. Uber, DoorDash or Grubhub could buy the company for stock, and acquire dominance in one of the most important markets. Ideally Postmates, represented by Frank Quattrone’s Qatalyst Partners, can set up a heated auction and encourage bidders to offer a hefty premium to keep it out of the hands of rival buyers.
Uber knows first-hand the value of strategic retreat. The company bowed out of capital-destructive price wars in Russia and China by merging its operations into local rivals Yandex and Didi Chuxing, respectively, and acquiring equity in firms more likely to prosper. Instead of delivering takeout, smaller firms should put themselves on the M&A menu.
- Delivery company Postmates has explored a sale to rivals including DoorDash and Uber Technologies, and is being represented by the tech specialist investment bank Qatalyst Partners, according to Recode. Postmates said in February that it had filed confidentially to go public, but the company’s prospectus has yet to be made public.
- Postmates was valued at $1.85 billion in a funding round earlier this year.
(Editing by Tom Buerkle and Amanda Gomez)
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