Uber Bows Down, Sells China Operations To Didi Chuxing

Uber Technologies Inc. has given up its costly battle for China’s riders, swapping its local operations there for a minority stake in the country’s homegrown champion, Didi Chuxing Technology Co.

Didi, which was valued at $28 billion in its latest fundraising round, said Monday that Uber and investors in its UberChina unit will take a 20% stake in the company. Combined with Uber’s China business that was valued at around $8 billion, Didi will have a valuation of around $36 billion.

After the merger, Uber will become the largest shareholder in Didi. The Chinese ride-hailing company will also invest $1 billion in Uber as part of the deal, a person familiar with the matter said.

The deal marks an end to Uber’s efforts to establish an independent foothold in China, which began in 2013 and was considered a rare case of a U.S. tech firm making inroads in the local market. Besides Apple Inc., which has struggled of late with slowing sales in China, few other companies have gone toe-to-toe with Chinese rivals for local consumers.

This merger “frees up a substantial resources for bold initiatives focused on the future of cities—from self-driving technology to the future of food and logistics.” Uber Chief Executive Travis Kalanick said in a prepared statement. Operating in China “is only possible with profitability.”

“We were a young American business entering a country where most U.S. internet companies had failed to crack the code and with the product that needed rebuilding,” he said.

Uber and Didi, which have been bitter rivals, will see their fate become firmly intertwined with the deal. Mr. Kalanick will join Didi’s board, while Didi founder Cheng Wei will join Uber’s board as part of the deal. After the merger, Uber will own 17.7% of Didi, with other existing investors in UberChina, including Chinese search giant Baidu Inc., taking another 2.3% of Didi.

In a joint statement, Mr. Cheng and Jean Liu, Didi’s president, called UberChina a “great competitor” in an “epic battle” for the fast-growing ride-hailing business in China.

Uber’s foray into private ride-hailing services in China began before Didi, which was founded in 2012, added that feature to its taxi-hailing business. UberChina has spent more than $1 billion over the past three years trying to gain traction, by offering subsidies to both drivers and riders. An analysis by consultancy BDA China Ltd. showed that UberChina and Didi both paid about 5 yuan a ride in subsidies, split between driver and passenger.

“We all knew the subsidies were clearly unsustainable,” said Duncan Clark, a longtime China tech consultant who runs the Beijing-based BDA. “The subsidies cost Uber and they couldn’t have gone public with that black hole.”

The deal comes after China last week released nationwide guidelines to legalize ride-hailing services. China’s new industry regulations, which will go into effect in November, forbid the running of ride-hailing services below cost.

It is unclear whether the deal, creating a single dominant company in the ride-hailing industry, will face scrutiny from Chinese authorities. Didi said UberChina will be kept as an independent brand and operation, but that all data will be owned by Didi.

Investors welcomed the deal, saying the long fight in China held the companies back from profiting in the short term.

“This makes sense for both companies,” said Andrew Teoh, managing partner of Ameba Capital, an early investor in Didi, noting the deal follows the same logic that led to other mergers among Chinese tech startups in recent years.

Didi has been a formidable fundraising machine, refusing to back down as Uber poured billions in subsidies into China. Didi raised $7.3 billion in its latest fundraising round in June, which included a $1 billion investment from deep-pocketed Apple. For Didi, Uber’s global reach could help the Chinese firm grow its business overseas.

When Uber announced a partnership with Ant Financial’s Alipay mobile payment system earlier this year, it propelled Alipay into 69 countries; previously it was only in a handful of markets. Research firm Analysys International said Didi had 42.1 million active users in May, while UberChina had 10.1 million.

After the merger, Didi will count all three of China’s biggest technology companies as shareholders—online shopping Alibaba Group Holding Ltd. , gaming-to-social leader Tencent Holdings Ltd. and Baidu.

CHINA: Uber And Didi Merge

Ride-sharing giant Uber is to give up its ferocious battle for market share in China by merging its operations with local rival Didi Chuxing, reports said Monday.

The deal will give Uber a 20 percent share in the combined firm, which will be valued at $35 billion, Bloomberg News reported.

Both companies have spent billions of dollars on subsidies for drivers and passengers, as well as trading vitriolic accusations, as they fought for dominance in the potentially lucrative market.

As reported, the structure of the agreement leaves Didi Chuxing in unquestioned control of the sector in the world's second-largest economy.

By "shedding its massive losses" in the country Uber will help clear its way to a future flotation, Bloomberg said.

The Wall Street Journal said a formal announcement could come as early as Monday.

A blog post circulating on Chinese social media purportedly written by Uber CEO Travis Kalanick said: "I've learned that being successful is about listening to your head as well as following your heart."

Uber China had "exceeded even my wildest dreams" as "most US technology companies struggle to crack the code there", he said.

But both firms were "investing billions of dollars in China and both companies have yet to turn a profit there", he added.

"Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term."

China-based spokesmen for both Uber China and Didi Chuxing did not immediately respond to requests for comment by AFP.

The reports come days after Chinese authorities announced new rules governing ridesharing, making clear for the first time that they may operate legally in the country.

The new rules will also forbid ridesharing platforms to operate below cost, possibly restricting their scope to offer subsidies.

Rides in major cities with Uber and Didi have often cost significantly less than regular cab fares due to the subsidies, and many drivers work for both companies at the same time.

Earlier this year Uber said it lost $1 billion annually in China, and Didi was thought to be dropping similar amounts of money.

One Didi driver was reluctant to believe the news of the merger Monday. "I think the combination news is a rumour," the man, surnamed Su, told AFP.

"I don’t think that would happen. If it is true, the allowance offered by Didi or Uber now will certainly decrease."

Didi, which claims almost 90 percent of the China ride-hailing market, said last month that it had recently raised $7.3 billion $1 billion of which came from Apple in one of the world's largest private equity financing rounds.

As part of the merger, Didi Chuxing will invest $1 billion in Uber, valuing the US firm at $68 billion, reports said.

Uber has become one of the world's most valuable startups as it has expanded to more than 50 countries, but it has faced regulatory hurdles and protests from established taxi operators in most locations where it has launched.

Its China business partners include internet search giant Baidu and state-owned Citic Securities, while Didi's backers include e-commerce titans Alibaba and Tencent, along with China Life, the country's biggest life insurer.

Analysts noted that the deal would create a massive single company with near-monopoly power in China.

Others saw it as a capitulation by Uber in the face of an overwhelming local rival.

"Uber knows when to fold them in China, after being engaged in an incredibly expensive ride war with Didi there," technology journalist Kara Swisher wrote on her recode.net site.

"Cutting the massive losses in China and turning it into a more solid investment" would clear the way for an expected Uber public stock offering next year, she added.

Reports in May said Didi was also mulling an initial public offering in New York in 2017.

Uber Raising Billions

It feels like almost every other week there is a new headline about Uber raising more money. "Uber Closes $1.6 Billion in Financing.'' "Uber Turns to Saudi Arabia for $3.5 Billion Cash Infusion.'' Last week, we got this one: "Uber to Raise Up to $2 Billion in Leveraged-Loan Market.''

If you add up all the money Uber has raised since it started in 2009 the idea was born when its founders became annoyed that they could not get a cab in Paris the ride-hailing app company is on its way to amassing a colossal $15 billion. That's real cash, not some funny-money, paper-based valuation. (That figure is $68 billion.)

It has done all this while still managing to remain a private company, and its chief executive, Travis Kalanick, has insisted that a public offering is not coming soon. "I'm going to make sure it happens as late as possible," he has repeatedly said.

So what exactly is Uber doing with all that money? And what does it say about Uber and the financial markets that the company has turned most recently to selling the equivalent of junk bonds?

Yes, Uber has to finance an all-out war to gain market share in China and India. But there is more to it than that: Uber's money-grab is seemingly part of an unspoken strategy to mark its territory.

Every time Uber raises another $1 billion, venture capital investors and others may find it less attractive to back one of Uber's many rivals: Didi Chuxing, Lyft, Gett, Halo, Juno. In other words, Uber's fund-raising efforts have seemingly become part of the contest: It's not just a rivalry over customers and drivers; it's a war of attrition, a mad scramble to starve the competition of cash.

At the moment, Uber's success has had the opposite effect: It has spawned a long list of rivals, big and little guys who say, "We can do it too." But over time, as the smaller competitors run out of cash — after heavily subsidizing riders in an effort to steal business from Uber — venture capitalists should be less inclined to put up even more cash to go up against Fortress Uber.

Uber's fund-raising arms race comes against the backdrop of falling valuations for many Silicon Valley unicorns — private companies worth $1 billion or more. So there's clearly a rush to take the money while it's still available.

"It's not the second inning or even the sixth, it's the 14th inning in a five-hour baseball game," Bill Gurley, the famed venture capitalist who has as a stake in Uber and sits on its board, warned on his blog about the state of Silicon Valley. He alerted investors about unicorns that come to them seeking funds: "You are not being invited to a special dance, you are being approached because you are the lender of last resort."

The ride-sharing industry has long been seen as a zero-sum game because of the "network effect": The more customers sign up for Uber, the more drivers sign up, making it tougher for rivals to mount competition. There will most likely be only one or two significant players in any given market. More on that in a moment, because there might be some cracks emerging in that point of view.

The question is whether the financing game is zero-sum too. And the even larger question is whether Uber's eye-popping capital investments could ultimately act as a deterrent to investors who might consider supporting Uber's competitors: Will they look at Uber's balance sheet — it has some $6 billion in cash just sitting there — and throw up a white flag?

So far, Uber is clearly winning the valuation game: It is worth more than virtually all of its rivals combined.

But Uber still has formidable competition in the fund-raising arena: Didi, the market leader in China that is engaged in a money-losing battle with Uber, just raised $7 billion, some of which came from Apple. Mr. Kalanick, too, was hoping to raise money from Apple and had planned to meet with executives at the iPhone maker the same week Apple announced its investment in Didi.

Perhaps strangely, several of the same investors that have backed Uber are also backing Didi in China, including BlackRock and Tiger Global, so it is hard to say that one service is deterring investment in the other at least not yet. It is worth noting that among the investor class, some may be hoping that Uber might one day merge its Chinese operation with Didi.

Uber's most recent fund-raising effort focused on the leveraged loan market — aims to avoid diluting the current base of shareholders. It has hired Morgan Stanley, Barclays, Goldman Sachs and Citigroup to sell about $2 billion in loans. By avoiding a traditional round of financing, the company also avoids the company having to risk trying to sell itself at an even higher valuation.

Given the remarkably low interest rates, investors looking for yield may buy into Uber.

Uber says it is profitable in North America, Europe, the Middle East, Africa and Australia — if you factor out taxes and interest payments. The challenge for Uber is breaking into China and India, perhaps the two largest markets in the world. Uber is currently on track to lose about $2 billion annually in those markets as it heavily subsidizes customers and drivers to gain market share.

That means that Uber will have to pay up for the financing. But if Uber's valuation continued to grow, it would be a bargain compared with the value of the equity. Uber is hoping to sell debt with a yield of about 4 or 4.5 percent.

Uber's I.P.O. will probably come to pass in the next three to four years. That's because some of the convertible debt it previously issued provides investors with a special discount if the company has not gone public by then.

But by 2018 or 2019, at the rate Uber is going, who knows how much money Uber will have raised. It may need none.