March 26, 2019 / 11:05 AM / a month ago

Breakingviews - Uber gets an IPO boost from Middle East deal

An illustration picture shows the logo of car-sharing service app Uber on a smartphone next to the picture of an official German taxi sign in Frankfurt, September 15, 2014. REUTERS/Kai Pfaffenbach

By Karen Kwok and Gina Chon

LONDON, SAN FRANCISCO (Reuters Breakingviews) - Uber Technologies’ $3.1 billion acquisition of Middle East rival Careem Networks should give its IPO a boost. It shows the group which is burning cash is still willing to spend to grow. And, by reducing competition in the fast-growing region, it gives potential investors one less thing to worry about.

Uber has been grappling with competition both at home and abroad. In the United States, smaller rival Lyft has gained market share, which now stands at about 30 percent according to Second Measure analysts. Overseas, boss Dara Khosrowshahi has been dealing with challengers by selling out to overseas rivals in exchange for a smaller piece of the action. Three years ago, Uber swapped its Chinese business for a nearly one-fifth stake in Didi Chuxing, and also concluded deals with Russia’s Yandex and Grab last year.

Buying Careem will put a dent in Uber’s finances. The San Francisco-based group will pay $1.4 billion in cash and $1.7 billion in convertible notes, which will swap into Uber shares at $55 per share. Uber was already burning through $1 billion a year, and last year reported a net loss of $1.8 billion, excluding one-off gains from disposals. The $3 billion price tag is 50 percent higher than the $2 billion valuation put on Careem in October’s funding round, according to PitchBook data.

Still, it makes sense to stay in the driving seat. The Middle East is a key growth market, with more than 40 percent of its population aged under-25, and so more likely to use ride-hailing services. The deal allows Uber to catch up, while cutting back on promotions to attract drivers. It was available in fewer cities and countries than Careem, partly due to a temporary ban in Abu Dhabi that was only lifted in November.

The most obvious winners are Careem’s backers, which include Saudi Prince Alwaleed bin Talal’s Kingdom Holding and Japanese group Rakuten. They get a partial exit at a good price, at a time when Careem would struggle to list, given its lack of profitability and the dearth of funds in the region. Uber at least has a cleaner growth story to tell when it eventually comes to market.

Breakingviews

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