Waitr Holdings: A Compelling M&A Target In The Consolidating Meal Delivery Market

Overview

Waitr Holdings (WTRH) pre-released earnings on July 6th, and I believe it’s a signal from management of its intentions to sell the company. With tons of activity going on in the sector, positive macro headwinds, and very positive financials, it looks clear to me that Waitr stock has a disproportionate number of positive outcomes on the horizon.

The starting point is to talk about the price (valuation) of a potential deal, followed by the rational (strategy) of a deal.

M&A Valuation

Acquisitions typically follow historical deal comps, and for this, we have two very close comparables that have occurred in the past 6 weeks. Conveniently, the two of them are showing very similar deal values, which makes this whole process very straightforward.

I believe the most appropriate valuation metric to use for the space is Price/Sales. Any other metric (i.e., profitability, cash flow) is largely nonsensical, since meal delivery services offered are very homogeneous and cost structures can be easily transported across companies.

Valuation Comp – GRUB Deal

For the Grubhub (GRUB)/JET (TKAYF) deal, we know there was a $7.3 billion price tag on Grubhub, which had $1.3 billion of revenues in the past twelve months. That represents a 5.6x revenue multiple. With the market growing as quickly as it is, arguably trailing twelve months is not the best metric to use, but I’d also say that revenue forecasts are all over the map in the industry due to COVID-19, so trying to use forward twelve months would suffer similar inaccuracies.

Valuation Comp – Postmates Deal

We know that the Postmates deal occurred at $2.65 billion, but we don’t have a precise revenue number. However, using market share data from Second Measure, we see that Postmates has roughly 1/3rd the market share of Grubhub, and conveniently, the price tag on the deal sits at 36% of the Grubhub deal. This puts the Postmates deal in the same ballpark range as the Grubhub deal – let’s call it 5x revenues.

Valuation Application – Waitr

So, where does this 5x revenue number put Waitr when it comes to stock price? With trailing twelve months’ revenue of $190 million, that multiple would value Waitr at just shy of $1 billion, or around $10 per share (up from today’s price of $3.39).

There are two sub-arguments that can be made here, which is whether there is a premium or discount for size (scale). On the cost synergy side of things, bigger deals are better, since the costs of merging the companies have a fixed nature. On the premium side of things, smaller companies often get bigger premiums simply because of “rounding errors of significance”, i.e., an extra $200 million price tag is a small difference to a large acquirer but a 20%+ different to the small acquiree. If a deal were to come through, I would give it a wide range of $7-13.

One last thing I want to note is the quality of Waitr’s market share. If it were a small number spread across many large markets, the deal becomes far less compelling. In reality, Waitr has a leading position in very specific markets, which is favorable to an acquirer.

Strategy

Waitr

An important question to ask is whether Waitr even wants to sell itself. My feeling is that the tell came from today’s pre-release of earnings, which was on the heels of the Uber (UBER)/Postmates deal being announced.

First of all, what is compelling Waitr to pre-release its earnings versus waiting 5 weeks to release them in an orderly “normal” fashion? The only good reason I can give you is stock price management (effectively pumping the stock price up). The $15 million+ EBITDA number that the company released was huge compared to historicals and forecasts, and shows the market that it’s comfortably making money in the current climate. The company knew it had a winning hand, and it wanted to show that today, not 5 weeks from now. But why?

I see three possible motivations being managing your stock price in the short term: (a) so management can dump stock, (b) so you can sell/issue stock to the public to raise funds for the operations, or (c) to engage possible suitors (or pressure existing negotiations).

While (a) is a possibility, I just don’t see it being a viable option in today’s market. The company is doing well, growing, the macro-climate is helping it – why would management rush to pump the stock price just to sell into that (and create massively negative market signals in the long term)? Aside from fraudulent operations/books, which I am extremely doubtful of, I see this being a very unlikely reason.

Option (b), to issue more shares, is certainly more likely than (a), but still not very likely because the company is reporting $50 million+ of cash on its balance sheet (and it just paid down some debt and converted some to equity). It’s not in financial distress, it’s now generating cash and growing. Aside from an ill-intentioned marketing blitz (against the really deep-pocketed DoorDash (DOORD) or UBER, or GRUB/JET), there’s no immediate need for cash.

Option (c), the sales route, seems the most likely of all the three. The data is very clear that consolidation is happening in the market right now, and strategically, everything that you can do to attract suitors – build momentum and show strength/shareholder interest – will increase your stature at the bargaining table. The M&A market has also moved at an incredibly pace – JET swooped in and bought GRUB in the middle of GRUB’s negotiations with UBER, and UBER then bought Postmates just weeks after losing GRUB. Days/weeks are the timelines that are relevant in today’s meal delivery M&A climate.

Uber

While Uber just gobbled up Postmates, I see no reason why it would be “done” buying at this stage. It’s clear that Postmates was a “bad second choice” to Grubhub (which was bigger and also profitable, and likely offered more synergies).

To me, Uber is the most obvious and natural suitor/purchaser of Waitr, and could do so handily by issuing $1 billion (or some amount near that) of Uber shares to acquire Waitr. Excluding synergies, the deal would immediately be accretive to Uber’s earnings, and including them, it would likely be a huge benefit.

In addition, Uber shareholders have shown a very positive reaction to the company’s acquisitive nature in this space (rallying heavily on news of the Grubhub deal being announced and on the Postmates deal announcement). If you had to guess, do you think Uber stock would rally or fall on the announcement of a purchase of Waitr?

In terms of consolidation costs, as messy as it is to roll Postmates and Waitr into Uber simultaneously, it’s probably easier than doing them sequentially.

Grubhub/JET

The Grubhub/JET deal is going to take a while to be fully consummated, but I can see a world where JET reaches out to grab Waitr while it’s waiting in the wings. Similarly, JET can issue shares to purchase Waitr, and JET shareholders have generally reacted positively to consolidation (albeit less so than Uber).

DoorDash

DoorDash is an interesting wildcard. On the surface, I think it’s a hard deal for DoorDash to do, since the company has limited cash on the balance sheet, it’s still burning a ton of money, and its investors (specifically SoftBank (SFTBY)) have certainly become more cautious with capital deployment. The biggest problem that DoorDash has is that it can’t realistically issue equity to make the deal happen, it has to pay cash. At the same time, a price of $500 million cash is something the company could potentially swallow, and would still represent a decent premium to Waitr’s current price. It’s possible, but increasingly unlikely, that DoorDash could do an equity raise and cobble together a ~$1 billion cash offer. The deal would be appealing to DoorDash, since it would be accretive to its cash flow, earnings, and market share.

The Waiting Strategy

The beauty of Waitr’s situation today is that it’s generating positive earnings/cash flows in a climate that appears to be with us for the foreseeable future (next 3-6 months minimum). In fact, the 20% YoY revenue growth that the company has put up so far is rather tame compared to marketwide growth of nearly 60%. (This is likely due to the COVID-19 impact being less serious in its primary markets historically. Going forward, that appears to be changing.)

The current stock price of $3.39 is extremely compelling, since the company has a profitable operation, a macro tailwind, and multiple motivated M&A suitors. I see this being a very compelling risk/reward.

Disclosure: I am/we are long WTRH, GRUB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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