Wedbush Explores What A Groupon-Yelp Merger Would Look Like

A potential combination of Groupon Inc GRPN with Yelp Inc YELP makes strategic sense, as the companies would complement each other, according to Wedbush. 

The Analyst

Ygal Arounian maintained a Neutral rating on Groupon with an unchanged $3.50 price target.

The analyst also maintained a Neutral rating on Yelp with an unchanged $38 price target.

The Thesis

The combination of Groupon and Yelp could generate revenue and cost synergies and create a combined entity that is in a better position to compete against digital advertising giants like Google, Arounian said in a Friday note. (See his track record here.)

The math behind the estimates assumes around $400 million in revenue synergies, or 10% incremental revenue to the current combined revenue, and $400 million in operating synergies in 2021, the analyst said. 

The combined entity would be able to generate EBITDA of between $1 billion and $1.4 billion, Arounian said.

These figures are far from an "automatic home run," and management would need to overcome challenges, including Groupon's ongoing customer losses and declining revenues, he said. 

Groupon can structure a deal in several ways, but will need to a pay premium to take over Yelp, the analyst said.

An all-stock offer is unlikely given Groupon's recent execution history, and a 50-50 cash/stock offer at $50 per share — 43% premium — would give Yelp investors a premium and the chance to further gain if management executes on synergies, according to Wedbush. 

Price Action

Groupon shares were trading 2.23% higher at $2.75 at the time of publication, while Yelp shares were trading down slightly at $35.05. 

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