The Street Serves Up Its Take On GrubHub's Potential Strategic Review

Shares of food delivery company GrubHub Inc GRUB spiked nearly 20% on Wednesday following a report the company is exploring strategic alternatives, including a potential sale of itself. A few sell-side analysts weighed in on M&A possibilities and potential antitrust concerns.

The Analysts

Morgan Stanley analyst Brian Nowak maintains an Equal-Weight rating on GrubHub's stock with a $33 price target.

Wedbush analyst Ygal Arounian maintains at Neutral, price target lifted from $30 to $45.

Bank of America analyst Nat Schindler maintains at Underperform, $30 price target.

Morgan Stanley's Thoughts

There are a few key points for investors to keep in mind amid unconfirmed media reports of a strategic review process, Nowak wrote in a note. These include:

GrubHub's reported interest in consolidation is consistent with prior expectations. The food delivery space needs to consolidate to become more ration within the fast-growing but cash-burning U.S. market.

Rivals DoorDash and Postmates are not public companies and lack the access to capital a company like Uber Technologies Inc UBER has. As such, Uber is the "most likely potential suitor" and a deal would be uber-bullish for the company.

GrubHub would bring several strategic benefits to a buyer, including a very profitable New York business that generates at least $150 million of annual EBITDA, potential integration synergies in terms of technology infrastructure and others, and GrubHub has an enviable relationship with corporations.

Any transaction will likely be heavily reviewed by regulatory bodies amid competitive concerns.

Wedbush: Combination With Doordash

If reports are accurate, Arounian said GrubHub is likely addressing ongoing pressures from post loyalty and deliver discounts in the third quarter. Among all the potential outcomes, a combination with Doordash "makes the most sense" and the Softbank-backed company could make a move to "support a market share grab acquisition."

GrubHub could takeover Postmates, which the analyst said would address some fundamental issues as Postmates has the smallest market share. Meanwhile, Uber's food delivery business has been a "particular pain point" for its investors who demand the company increase its focus on profit.

"A combination feels inevitable at this stage, and a market share grab may be the only way out of extended irrationality," Arounian wrote in a note.

BofA: Inconvenient Timing

The report comes at a "quiet period ahead of earnings," Schindler said. In fact, GrubHub has been offering customers high levels of couponing and incentives, including daily rewards for heavy users. This creates some risk for EBITDA per Order in the coming earnings report.

Meanwhile, the U.S. food delivery market remains "arguably irrational" as players are committing hundreds of millions of dollars towards discounting, incentives and brand campaigns, the analyst wrote. Uber could eliminate some of these expenses but Uber's management may have other priorities to focus on.

As Nowak also said, an Uber-GrubHub combination could face antitrust issues as their combined market share in some markets is "well over" 50%.

Price Action

Shares of GrubHub traded around $55.30 at time of publication.

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