Investors flocked to Grubhub’s debut high yield offering this week, energized by the online takeout dining platform’s strong market position and consistent performance, according to eight sources tracking the situation.

As one of the original operators in the nascent space in 2004, Grubhub is accustomed to fending off upstart competitors. But the current proliferation of rivals with strong growth – and heavy promotional activity– underscores the perpetual competitive and technology risk the company faces.

Grubhub upsized its JPMorgan-led bond deal by USD 100m to USD 500m and cut the roadshow short, pricing yesterday instead of today due to strong demand, sources said. The Ba3/BB USD 500m senior unsecured notes due 2027 priced at 5.5% and par, the tight end of official talk at 5.5%-5.75% area and tight of initial whispers at 6%-6.25% area.

The notes traded to 101.625 on the break to yield 5.18%, a trader said.

Proceeds from the deal are expected to repay USD 340m of borrowings under the company’s senior credit facility, as well as provide cash for the balance sheet.

Grubhub is 2.3x levered, based on USD 221m of LTM adjusted EBITDA and USD 500m of pro forma total debt.

Following the bond placement, liquidity totals roughly USD 578m through USD 358m of cash and about USD 220m availability on its revolver due 2024.

Sources expect Grubhub to generate USD 117m-USD 167m (23%-33% of total debt) of free cash flow in 2019, based on USD 235m-USD 265m of adjusted EBITDA, USD 70m-USD 90m of capex and roughly USD 28m of interest expense.

Takeout food fight

Grubhub competes with other takeout providers such as DoorDash, Postmates, Uber’s Uber Eats and now Amazon’s Deliveroo, who are all angling for growth and potentially turning the takeout industry into a commodity business, according to the sources

Restaurants pay takeout delivery services such as Grubhub to drive demand for takeout. Grubhub’s business model can be split into two categories: restaurant delivery and Grubhub delivery. In the restaurant model, the restaurant is responsible for the commission fee to Grubhub and providing its own delivery method. In the Grubhub model, the restaurant must pay a higher commission fee, but Grubhub will provide delivery.

Grubhub, which owns NYC operator Seamless, last year completed the acquisitions of Tapingo, a mobile takeout platform for college markets for USD 152m and LevelUp, a POS-integration and mobile takeout platform, for USD 369m.

In the competitive landscape, DoorDash, Postmates and Uber Eats tend to offer strong stronger promotional deals to new customers than Grubhub typically does, according to two of the sources.

Though nearly 90% of Grubhub’s business comes from returning customers, sources point out that the company could grow and keep hold of its market share by increasing promotional outreach to new customers.

“Grubhub needs to keep up with its competitors on the promotional front. It may draw on their free cash flow on the capex front, but theoretically would yield more on the EBITDA front, if executed correctly,” one buysider said.

With the food delivery market expanding, Grubhub’s market share has dropped to roughly 35%-40% for the LTM period ended 31 March, from over 50% a few years ago, according to an S&P credit report.

“Grubhub is still a market leader, but it’s losing market share. Granted, the market overall is also growing really fast, but Grubhub isn’t growing as fast,” a buysider said.

To counter, a Grubhub spokesperson said, “It’s important to consider that market share data doesn’t account for overall growth in the industry and tends to be based on the faulty assumption of a “zero sum game.” Everyone in the space is growing, and Grubhub has accelerated growth for six consecutive quarters in all our markets – big and small alike.”

Active diners, defined as the number of unique diner accounts that have placed an order on Grubhub in the last year, increased 9% to 19.3m in 1Q19 and are up 33% versus 2017, according to company documents.

DoorDash is now worth USD 12.6bn after raising USD 600m in series G funding in late May, bringing its fundraising total to USD 2bn. Softbank’s Vision Fund has been one of the biggest investors in the company, according to media reports.

DoorDash’s valuation has increased nine-fold since March 2018, when Softbank led a USD 535m investment at a USD 1.4bn valuation. The company’s CEO Tony Xu has said that he plans to use proceeds from the fundraising for among other things implementing a delivery service for non-food companies, such as Walmart.

Postmates raised its own USD 100m earlier this year at a USD 1.85bn valuation. The company announced in February that it confidentially filed an S-1 to the SEC for a proposed IPO.

Grubhub’s equity is trading at a lofty 28x EBITDA multiple, given its USD 5.75bn market cap, USD 500m in debt, and USD 221m in EBITDA. The stock traded today at USD 63.46 per share, up 0.50% from yesterday’s close, but down 40% over the last year.

Sources speculate that with trade tensions between the US and other countries weakening the capital markets, Postmates could be waiting for a more stable market to complete its IPO – especially after Uber’s lackluster reception.

For its part, Uber Eats has been driving revenue growth for its cash-burning parent. In 1Q19, Uber Eats’ gross bookings, or revenue less taxes, fees, driver wages, restaurant wages and such, grew 108% year-over-year to USD 3.07bn, according to SEC filings.

To offset the cash burn, Uber has also received capital injections from Softbank, according to media reports.

Uber’s USD 1.5bn 8% senior unsecured notes due 2026 last traded yesterday at 107 to yield 6.44%, up from recent trades in the 105-106 range, according to MarketAxess.

Amazon also led a round of investing in British food-delivery company Deliveroo for USD 575m, which preps Deliveroo to compete with Uber Eats in the international markets.

“We’re refinancing our debt to take advantage of the current interest rate environment,” said the Grubhub spokesperson. “Our company has grown and evolved over the years and it now makes sense to put in place a more permanent capital structure to better fit our current organization.”

JPMorgan did not respond to a request for comment.

2019 Debtwire