By Tim Higgins 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 3, 2020).

Uber Technologies Inc. needs a win.

After a failed bid for Grubhub Inc., the ride-hailing giant is trying to buy much smaller food-delivery company Postmates Inc. as it seeks surer footing in the era of Covid-19.

The San Francisco-based company needs to get stronger in the competitive world of food delivery as the pandemic has crushed its rides business and surging infections have subsumed early hopes for an economic recovery and people returning to offices.

The food-delivery industry was ripe for consolidation even before the pandemic hit, as the biggest companies turned their sights toward making profits on the heels of fast and expensive growth and amid increasingly overlapping markets. As consumers stayed home to stop the spread of the virus, food-delivery became a lifeline for restaurants battered by lockdowns and a relative area of activity in a deteriorating economy.

"Uber's back is against the wall to do a deal in food delivery given the consolidation phase has kicked off," said Dan Ives, an analyst for Wedbush Securities. "They're at the prom looking for a dance partner and there's really only one in the room: It's Postmates."

Mr. Ives estimates that Uber Eats could save itself seven to 10 years of trying to grow its business with a Postmates acquisition.

In May, Uber cut roughly a quarter of its workforce and Chief Executive Dara Khosrowshahi said the company planned to trim $1 billion in fixed costs after stay-at-home orders to halt the spread of the coronavirus ravaged the company's core business. Rides, which accounted for three-quarters of Uber's revenue before the pandemic, plunged as much as 80% in April. Last month Mr. Khosrowshahi said that had improved somewhat to a 70% decline.

He said in May that Uber Eats, the company's delivery arm, was a bright spot. In the first quarter, Eats gross bookings surged 52% from the year-earlier period to $4.68 billion. Analysts surveyed by FactSet, on average, expect the category's second-quarter gross bookings to jump 65% from last year to $5.6 billion.

Shares of the ride-hailing giant soared after reports this week that it's in talks to acquire San Francisco-based Postmates for $2.6 billion, as investors bet a tie-up would allow the company to find savings amid the costly work of building out a delivery operation. When news emerged June 10 that Grubhub had spurned Uber for another suitor, Uber's shares had one of their worst days of the year, underscoring the importance of some kind of deal.

The ride-hailing giant's shares have recovered from lows hit in March as Uber cut jobs and costs and made clear efforts to reposition itself amid the pandemic, but they haven't returned to levels preceding news of GrubHub's sale.

Food delivery is an expensive undertaking, and companies have offered steep discounts to get consumers to try out their services. Morgan Stanley projects that Eats will lose $340 million next year globally.

Uber didn't respond to a request for comment.

A deal would boost the ride-hailing company's food footprint in Los Angeles and Phoenix, where Postmates has 35% and 19% of those markets, respectively, according to research firm Second Measure.

Brian Nowak, an analyst at Morgan Stanley, estimates U.S. food-delivery sales will grow to about $45 billion this year from $31 billion in 2019. Mr. Nowak raised his estimate for 2020 based on an expected shift to online ordering amid shelter-at-home orders. He sees the industry growing to $86 billion in sales in 2025.

With about 23% of the U.S. market, Uber Eats slightly edged out Grubhub in meal delivery sales in May, to be ranked No. 2 behind DoorDash's 45%, according to Second Measure. Postmates had 8% of the U.S. sales that month, the most recent full-month data available from the researcher.

Uber's attempt to acquire Grubhub fell apart in June, in part because of regulatory concerns that it would create a monopoly in New York City. Instead, Grubhub turned to Dutch food-delivery giant Just Eat Takeaway.com in a deal valued at $7 billion.

After that, Postmates, the smallest among the major U.S. players, was seen as the next likely target for Uber. Should a deal come together, it could be announced next week if not sooner, according to a person familiar with the matter. There's no guarantee a deal will be reached and Postmates, which has held discussions with other possible buyers since at least last year, has been simultaneously planning an initial public offering.

When Uber reported results for the first quarter in May, Mr. Khosrowshahi said that along with growth in food delivery, he was encouraged by early signs from markets that were beginning to open back up.

But a return to normal is unlikely soon, as a recent surge in Covid-19 cases and hospitalizations in states such as Florida, Texas and California force or extend shutdown measures indefinitely.

California's turn from bright spot to hot spot is especially troublesome for Uber, as two of its largest markets -- Los Angeles and San Francisco -- are located in the state. Those cities along with New York City, Chicago and London made up almost a quarter of the company's gross ride bookings last year. Analysts surveyed by FactSet, on average, expect Uber's ride-hailing gross bookings to decline 62% in the second quarter compared with the first three months of the year.

Gov. Gavin Newsom on Wednesday rolled back some reopening plans as cases explode across America's most populous state. Among the latest directives: mandatory closure of many indoor restaurants.

Write to Tim Higgins at Tim.Higgins@WSJ.com

 

(END) Dow Jones Newswires

July 03, 2020 02:47 ET (06:47 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
Uber Technologies (NYSE:UBER)
Historical Stock Chart
From Jul 2020 to Aug 2020 Click Here for more Uber Technologies Charts.
Uber Technologies (NYSE:UBER)
Historical Stock Chart
From Aug 2019 to Aug 2020 Click Here for more Uber Technologies Charts.