Grubhub: empty stomach
Grubhub, the $5bn food delivery company, has put itself up for sale, the Wall Street Journal reported Wednesday. Its shares rocketed on the news, closing the day at $54.75 — up 12.58 per cent.
The news isn’t that surprising as Grubhub had a difficult 2019. During the year, its market value almost halved due to pressures from aggressive competition in the form of Uber and DoorDash, slowing market growth and what management described as “promiscuous customers”. Very Victorian.
The question is though, what price might a perspective buyer pay for the company?
Fortunately, we have some sort of a benchmark. In August, Square — Jack Dorsey’s payments company — announced it was selling its much smaller food delivery business, Caviar, to DoorDash for $410m.
The revenue multiple DoorDash paid for the money-losing Caviar, including Square’s revenue guidance for 2019’s fourth quarter, came in at 2.58 times:
So that might give us some clue as to what Grubhub might sell for, if there’s a willing buyer.
Before we run the numbers for Grubhub, a few caveats: we don’t know whether DoorDash assumed any debt from Caviar (which would make the equity value, and the revenue multiple, lower) and Grubhub, unlike Caviar, is also profitable. Even if those profits, which totalled $9.2m on $971m of revenue in the first nine months of 2019, are diminutive.
Now that’s out the way, let’s figure out the equity value. A revenue multiple of 2.58, on Grubhub’s estimated 2019 revenues of $1.3bn (including the middle of guidance for the fourth quarter), would bring the total deal value to $3.3bn.
However, a potential acquirer will factor in Grubhub’s $186m of net debt (including lease liabilities, thanks IFRS 16), which marks the equity value down to $3.15bn.
On a fully diluted basis, that’s only $33.98 per share — 38 per cent below where Grubhub’s stock closed yesterday. If you’re wondering how a private equity buyer might look at this price, the enterprise value to ebitda multiple (again, including fourth-quarter guidance) is also pretty high for a slowing, low margin business: 33.6x.
We wonder who will bite? Uber has been mentioned, but by all accounts its Eats division is facing similar pressures to Grubhub. Regardless, it seems there’s a good chance the price will be far below investors’ current expectations.