Uber and Deliveroo: merger on the cards with Amazon on sidelines

Reports that Uber and Deliveroo could be considering partnering up has caused a stir in the online food delivery market, knocking shares in platform rivals like Just Eat, Delivery Hero and Takeaway.com. We have a look at what a deal could mean, and why Amazon is worth watching.

Joshua Warner @JoshWarner_IG
Analyst, London

Publication date : 2018-09-25T17:45:28+0100

Source: Bloomberg

The online food delivery market may be worth close to $100 billion and many of us may have become accustomed to nipping downstairs to pick up our lunch from a cyclist or ordering dinner through a mobile app, but the industry has only captured a small slice of the opportunity on offer.

With the market ripe for the taking, companies are starting to make major efforts to grow internationally. Recent reports that Uber and Deliveroo are in early-stage talks about teaming up have got markets preparing for what could be the industry’s biggest ever deal, and the strongest signal yet that consolidation is to remain on the horizon for the foreseeable future.

The sector has evolved down two channels, which are increasingly blurring into one. The first are platform-based firms like Just Eat, which don’t deliver the food from the restaurant to the customer but simply provide the platform that small chains with their own delivery operations need to automate transactions and reach a wider audience. The second has been about providing the actual delivery services to restaurants that lacked them and opening up a second stream of revenue for restaurants that previously wouldn’t have dared entrusted their ‘ravioli with foie gras and white truffle’ or ‘beluga caviar and pearls’ with a Deliveroo or Uber cyclist.

Both have their benefits and their drawbacks, but the gap between the two has widened. Platform-based firms have been able to grow at a faster rate – Just Eat became a member of the FTSE 100 late last year – because they can operate on a national level as they simply deploy their platform to wherever it is needed, whereas firms like Uber and Deliveroo have much more labour-intensive operations and are limited to entering major cities where there is enough riders and restaurants.

Both types are increasingly stepping on one another’s toes. Just Eat, for example, has tentatively started to provide delivery drivers for restaurants that want them, while Deliveroo has begun accepting chains that have their own drivers. And Delivery Hero, which listed in Frankfurt last year and represents the most formidable competition in Europe outside the UK market, also adopts a ‘hybrid’ model of offering a scalable platform with a fleet of delivery drivers.

With no market yet mature, and some yet to even get off the ground, the industry has realised the battle will not be fought on a national level but on the international stage. Just Eat, Deliveroo, Uber, Delivery Hero and Takeaway.com all operate in multiple countries to further encroach on one another’s territories.

With the market heating up and everyone eyeing the menu – including Amazon as it continues its boundless expansion – we have a look at a possible tie-up between Uber and Deliveroo and the effect it could have on the rest of the market.

Is Uber buying Deliveroo?

Both companies are currently keeping quiet, but numerous (albeit unnamed) sources have confirmed that Uber has made an early stage approach to acquire Deliveroo since being first reported by Bloomberg.

Both companies are currently private so public information is slim but some form of announcement is expected in the coming weeks once the pair have sized each other up. Although attention is on a possible merger there is growing expectation that Uber could look to make a sizeable investment and partner with Deliveroo rather than buy-up the whole company – and that is partly down to price.

How much is Deliveroo worth?

Deliveroo has grown substantially since being founded in 2013, with its latest fundraising last year valuing the business at $2 billion. However, it is important to remember that Deliveroo is not up for sale and that it would demand a significant premium should it consider any offer.

Multiple reports have emerged implying Deliveroo’s management and existing shareholders – including the likes of T Rowe Price and Fidelity, who invested last year – would hold out for a price no less than $4 billion. A hefty sum for Uber, which is one of so many companies attracting investor interest despite still being deep in the red.

This price tag has raised the likelihood that, should any deal be struck, Uber makes a significant investment in its British counterpart to create a formidable partnership – it doesn’t need to own all of the company to control or influence it. While the price will be a sticking point (it always is), everything remains on the table from a full-on takeover to a joint venture, or very possibly nothing at all.

Why does Uber want to buy Deliveroo?

There are clear reasons why a combination of UberEATs and Deliveroo is enticing. Both need to catch up with the vast lead that their platform rivals have gained – Just Eat comfortably holds more market share in the UK, Europe’s most mature market, than Deliveroo and Uber combined – and to accelerate their expansion into Europe.

Uber is best known for its ride-hailing services that have upheaved incumbent taxi drivers in cities around the world, but the launch of a standalone UberEATs delivery service app in 2016 turned what was initially a very limited side offering into an important source of growth.

One reason for the heightened focus on UberEATs is because it has had a much more troublesome time with its core business – Uber’s general manager for the UK said he ‘absolutely accepted’ London’s decision to temporarily withdraw its licence last year and it has recently sold-off its ride-hailing services in Southeast Asia, China and Russia.

Another is because it sees a correlation between its two businesses, either entering a new city with its ride-hailing service and following up with UberEATs afterwards or vice-versa, and its delivery service is active in less than half the amount of cities its ride-hailing service is in. Whereas previously it would use its ride-hailing market to introduce UberEATs it has increasingly started launching its delivery service in locations where it has no presence and last year one-third of all new UberEATs customers had never used its ride-hailing service before.

Fusing Uber’s strengths in the US with Deliveroo’s in Europe

Uber’s main market is in the US, where UberEATs is the fastest growing company in the sector but still far behind much larger competition like GrubHub. Deliveroo may have no presence in the US but it does have the operations to help complete UberEATs’ European jigsaw. While UberEATs is in the likes of the UK, France, the Netherlands, Poland and Belgium, Deliveroo offers additional territories including Germany, Ireland, Spain and Italy.

Uber chief executive, Dara Khosrowshahi, has put UberEATs at the top of his growth agenda, and the head of the delivery service at a global level, Jason Droege, told the Financial Times in March that Europe was ‘super important’ to the company’s ambitions.

_{(Source: Statista. The Restaurant-to-Consumer Delivery segment includes the delivery of meals carried out directly by the restaurants. The order may be made via platforms [e.g. Delivery Hero, Just Eat] or directly through a restaurant website [e.g. Domino's]. The Platform-to-Consumer Delivery market segment focuses on online delivery services that provide customers with meals from partner restaurants that do not necessarily have to offer food delivery themselves. In this case, the platform [e.g. Deliveroo] handles the delivery process.)}

Uber had already unveiled big European expansion plans and any deal with Deliveroo is likely to accelerate and enhance them. Earlier this year it said it was targeting 100 more European cities going forward, equal to about half of Deliveroo’s total operations at present.

Uber and Deliveroo race to be the first to launch IPO

With their expansion plans not coming cheap, both Uber and Deliveroo have been teasing investors with their plans to go public. Both have plans to conduct an initial public offering (IPO) and both have pushed back their listings as they wait for the right time. Uber’s IPO is tentatively pencilled in for next year, while Deliveroo’s plan to come to market in 2019 is thought to have been pushed back to 2020 as it is reported to be considering raising another round of funds before opening itself up to public scrutiny.

Although both have been reluctant thus far, Uber and Deliveroo are both thought to want to be the first to market to grab investor attention - individual and institutional. Many might feel they can only have one in their portfolio and not the other – Japanese firm Softbank was reported to pull out of talks about providing financing to Deliveroo last year to concentrate on the existing support it provides to Uber.

IPOs aside, talks between the pair could throw up some alternative options for both to consider, particularly if it helps alleviate the huge funds they will need to become global leaders and speeds up the process towards profitability.

Uber-Deliveroo: taking on market-leading platforms like Just Eat

Combining the power of UberEATs and Deliveroo is not just about sizing up to take on the larger competition but also streamlining the industry so they could compete more effectively. In markets that UberEATs and Deliveroo share, like the UK, customers often find themselves interchanging between the two services, a problem not shared with Just Eat’s platform. If customers aren’t choosing between UberEATs or Deliveroo, then Uber believes the pair have a better chance of drawing people away from the leading platform.

In Europe, where both UberEATs and Deliveroo are trying to build foundations, the pair have to contend with German firm Delivery Hero, active in over 40 countries with a fleet of about 7000 drivers, and smaller Dutch rival, Takeaway.com, which has made the Netherlands and Germany its two main markets but built leading positions in Belgium, Poland and Austria. Both European rivals are, however, loss-making like their British and US peers.

Any Uber-Deliveroo deal could face competition concerns

It is worth considering the regulatory implications of any deal potentially struck between Uber and Deliveroo. When Just Eat bought Hungryhouse from Delivery Hero earlier this year, there were concerns that the FTSE 100 firm buying its closest rival would diminish competition, but the takeover was waved through because, in the UK Competition and Market Authority’s (CMA) eyes, the rise of Deliveroo and UberEATs represented more of a threat and should supply ample competition in the market.

If what is deemed to be two of Just Eat’s biggest competitors look to join forces then the CMA could view it as a catch 22 situation: combining UberEATs and Deliveroo would allow them to compete more effectively against Just Eat, but it also takes out a key player and reduces the choice on offer to consumers.

Still, the weighting at present (in the UK, anyway) would likely be toward clearing any deal, with independent takeaways outside of the new digital era still holding significant market share and other companies like Domino's Pizza Group (which deals with its own deliveries) providing alternatives.

Deliveroo has big decisions to make

While many would envy being the talk of a takeover at over double the current valuation, the possibility of linking up with Uber has thrusted some serious questions into the laps of Deliveroo’s management and shareholders.

Deliveroo’s existing investors will be digging deep to decide whether this could provide the perfect opportunity to cash out and book a profit or wait it out in the belief the business can deliver the growth it forecasts over the coming years, potentially making the current $4 billion price tag rather low in the not-so-distant future.

The decision is critical. Rejecting any partnership with Uber could shut off its best opportunity to scale-up and achieve its international ambitions and would turn Uber from a cooperative partner to fight against the larger platforms into another competitor that would likely step up its game against Deliveroo (and largely win if it comes down to size) should no deal be struck as it wouldn’t see the firm as providing opportunities but threats.

Uber-Deliveroo deal: Amazon could revive its interest

Talks between Uber and Deliveroo could prove to be the first stroke in what will be a very different picture of the industry in one or two years’ time. It has since been revealed by The Telegraph that e-commerce and cloud computing giant Amazon has made two ‘exploratory’ approaches to Deliveroo, most recently just nine months ago.

It was first intrigued by the British firm back in 2016, months before it launched Amazon Restaurants, its own rival delivery service in London that forms part of its ever-growing Prime bundle at the heart of its strategy.

Amazon is all about the long term and while no industry seems to be out of its grasp – having moved into diverse areas such as prescriptions and artificial intelligence – it has only laid the foundations in most areas. The fact its service severely lacks the scale of UberEATs, Deliveroo or Just Eat will only encourage it to use its financial firepower to swallow up those making moves in the market.

This has been demonstrated by its acquisition of Whole Foods to enter the US and UK grocery markets which, although facing heightened competition from the likes of discount chains, are still dominated by long-standing giants like Tesco and Walmart. The journey has been slow but steady as usual, having launched same-day grocery sales in US cities and the likes of London two years ago. It all ties in together.

Uber’s interest in Deliveroo could reignite Amazon’s interest, which helps support the idea that the British company could earn an impressive valuation. Even if Amazon revisits the matter and decides Deliveroo doesn’t have what it is looking for the formidable threat posed by the combination of Uber and Deliveroo could prompt it to take defensive action and make a reluctant bid – even Amazon gets scared.

Uber-Deliveroo deal knocks Just Eat share price and others

News of the possible tie up surfaced on 20 September, hitting shares in European rivals, particularly Just Eat that, having hit an all-time high in February, plummeted to its lowest level since September 2017, evident in the chart below (the news release is indicated by the red oval). Delivery Hero shares fell by as much as 3% before rebounding somewhat, while Takeaway.com has dropped 4% since the news emerged.

Just Eat chart

Online takeaway delivery market set for mergers, IPOs and other deals

According to Statista, in the UK, one of the most mature markets, 42% of all takeaways are still ordered by phone and all of this, as far as Just Eat, Uber and Deliveroo are concerned, is up for grabs. Elsewhere the opportunities are even more attractive, with the global average thought to be closer to 90%. Platforms may have carved out a sizeable lead in national markets, and the likes of Uber and Deliveroo have control over busy city centres, but in reality the entire market is at a very early stage and consolidation will remain a common theme as the battle pans out on the international – rather than national – stage.

Online food delivery market breakdown: major markets

$, billions	US	UK	Europe	China	World
Total revenue	20.2	3.4	12.5	41.7	96.2
Platforms	2.0	0.5	1.7	12	17.5
Annual ARPU	$105.06	$124.02	$83.03	$57.4	$56.96
User penetration	5.8%	6.5%	3.1%	15.1%	6%
Restaurant delivery	18.2	2.8	10.8	26.6	78.7
Annual ARPU	$274.11	$162.88	$101.95	$83.25	$91.11
User penetration	20.2%	26.1%	15.7%	25.7	16.8%
Growth to 2022 (annual revenue in 2022, billions)
Overall CAGR	9.7% (29.3)	9.8% (4.9)	11.8% (19.5)	10.2% (61.5)	11.1% (146.7)
Platforms	10.1% (2.9)	9.8% (4.1)	15% (3.0)	13.3% (19.8)	14.6% (30.2)
Rest’ delivery	9.7% (26.3)	10% (0.8)	11.2% (16.5)	8.9% (41.4)	10.3% (116.5)

US companies will be looking for springboards into Europe and vice-versa, those with scaleable platforms with look to pair with those that have the fleet of delivery drivers they lack, and all of them with be looking to grow at a faster rate than the competition. Pressure is building to get the first order in before everything on the menu gets eighty-sixed.