By Felix Bacchetta and Hannah Vhora (Wharton School), Lorraine Jiang (Columbia University) - Date: 13/04/2019
Overview of the deal
Acquirer: Uber Technologies Inc.
Target: Careem Networks FZ
Estimated value: $3.1 billion
Announcement date: 25/03/2019
Acquirer Advisors: Morrison & Foerster
Target Advisors: Jefferies LLC
Uber Technologies Inc. have confirmed their acquisition of Careem Networks FZ, for $3.1bn which will be Uber’s priciest acquisition and will mark the first time the company bought one of its regional competitors. This will buy Uber control in the Middle East, before a greatly anticipated initial public offering, and highlight its global footprint in comparison to rival Lyft Inc. Uber stated it would pay $1.4 billion in cash and $1.7 billion in convertible notes. The notes will exchange at a price of $55 per share, that is a 13% premium over Uber’s latest stock valuation. Over the past year, Careem’s business has grown exponentially, which now includes a delivery service. This tended to almost double their valuation, which compelled Uber to increase their bidding price.
The acquisition deems Careem a completely owned subsidiary of Uber, however the Careem brand and service will remain intact and separate from Uber. The Careem co-founders; Mudassir Sheikha, Magnus Olsson and Abdulla Elyas plan to stay with Careem following the acquisition, but otherwise three out of the total five board seats will be overhauled by Uber.
This agreement must adhere to regulatory judgement, including antitrust officials in the countries where Careem operates, which includes Turkey, Dubai, amongst other parts of the Middle East. This could prevent the progression of the deal or the companies may be obliged to alter their agreement.
“With a proven ability to develop innovative local solutions, Careem has played a key role in shaping the future of urban mobility across the Middle East, becoming one of the most successful startups in the region. ” - Uber CEO, Dara Khosrowshahi
Company Details (Uber)
Uber is a transportation network company that specialises in ride service hailing, ride-sharing, as well as food delivery and a bicycle sharing system. Uber operates in 785 metropolitan areas across the world.
- Founded in 2009 in San Francisco, California
- CEO: Dara Khosrowshahi
- Number of employees: 16,000
- Market Cap: $90 billion -EV: $75 billion
- LTM Revenue: $11.3 billion -LTM EBITDA: $-1.8 billion
- LTM EV/Revenue: 6.6x -LTM EV/EBITDA: NA
*Rough estimates given that Uber is a private company. Note that Careem’s financials are fully undisclosed.
Company Details (Careem)
Careem is a transportation network company based in Dubai, that specialises in ride service hailing and ride sharing. Careem has operations in over 100 cities in 14 countries in the Middle East, Africa, and South Asia.
- Founded in Dubai, United Arab Emirates, March 2012
- CEO: Mudassir Sheikha
- Number of employees: 1,700
Projections and Assumptions
Short term consequences
In 2018, Uber lost $1.8 billion as a result of increased costs from driver incentives, subsidized operations and aggressive expansions. Just ahead of the upcoming IPO, the acquisition can be seen as an effort from Uber to enter existing client bases and explore services beyond ride-hailing in underdeveloped markets. It is Uber’s largest acquisition to date and also another takeover of a Dubai unicorn following Amazon’s acquisition of e-commerce startup Souq in 2017.
The deal is expected to close near the first quarter of 2020, which means it will not be reflected in the first couple of quarterly earnings immediately after its IPO. However, it is likely to be disclosed in a public IPO filing. Uber has also been eager to close an agreement on the deal before the “roadshow” for its IPO, during which Uber will gain access to public market investors prior to its listing on the New York Stock Exchange. The performance of Careem can subsequently impact the upcoming valuation.
The deal can also help revive Uber’s short-term growth rate amid its recent decline by boosting revenue growth. Uber recently reported $3B in Q4 2018 revenues, but with a net loss of $865M after a tax benefit that would have otherwise resulted in a $1.2B net loss. The addition of Careem offers Uber an opportunity to pitch the growth story to its investors ahead of going public. Overall, the acquisition allows Uber to claim regional dominance in the Middle-East, continuing its expansion beyond the U.S.
Long term upsides
After Uber’s initial launch in Dubai five years ago, it faced significant competition from established local ride-hailing services. In order to establish a larger presence in the Middle East, Uber sees the buyout as an “opportunity for both companies to rapidly expand and capitalize on the region’s underpenetrated mobility opportunity and growing digital economy”. With the addition of Careem’s operations in 98 cities compared to Uber’s 23 locations, Uber can improve its balance sheet by taking advantages of established revenue streams rather than relying on booking rates. The company will also have more success tapping into readily available client bases.
By combining the global presence and technical expertise of Uber with the regional infrastructure and innovative solutions of Careem, the acquisition allows Uber to not only dominate the Middle-East as a ride-hailing service, but also diversifies its services to include food and package delivery, bus services, scheduled rides and credit transfers. The inclusion of these micro-mobility services marks Uber’s gradual transition to a multi-modal mix, also exemplified by its $200M acquisition of the e-bike startup Jump last year. Though Uber and Careem will remain structurally independent, certain synergies include speeding up delivery of digital services to consumers through Careem’s digital payment platform Careem Pay and Careem Now. The acquisition will also cut costs and increase trip growth for Uber by having more mobility, predictability and broader internet opportunity in the region, leading to more predictable earnings by making trips more efficient.
Uber’s business has been facing tougher regulations in its Western markets and rising costs from legal and policy changes such as tightened congestion and pollution regulations. The oil-rich Middle-East with lighted regulations and greater demand for ride-hailing services offers a more stable client base for Uber.
Risks and Uncertainties
The acquisition of Careem marks a significant shift from Uber’s previous strategy of divesting from unprofitable emerging markets. Since 2016, the ride-hailing giant started selling its operations in underperforming markets, acquiring stakes in local rivals along the way. The goal was to push Uber closer to making a profit to help the firm achieve a successful IPO. With its latest acquisition, Uber chose to renew with its aggressive expansion plans, which, despite the attractiveness of the Middle-Eastern customer base, inevitably creates additional uncertainty in Uber’s business. The deal is not expected to enhance Uber’s bottom-line, but rather to draw in a large young and tech-savvy user base. Indeed, PwC estimates that out of the total 400 million people living in the Middle-East, 40% are under 25 years old, making the region one of the world’s youngest. As Uber repeated its ambition to reach the symbolic threshold of a billion users before its IPO, Careem, with its large customer base, is expected to help Uber achieve its objective. However, this may come at a great financial cost, should Careem’s operations prove deceiving.
Moreover, as Cass Business School Professor Meziane Lasfer notes, it is quite unusual for private companies to complete large M&A transactions right before their IPOs. On the contrary, IPOs provide a way for companies to raise capital and complete transactions right after. Had Uber waited to go public, it would have been able to finance the acquisition fully with on hand cash or public equity. With the convertible offering, Uber may give up significant upside in its stock, should Uber’s post IPO share price rise above $55. The total payment of $3.1bn, which could rise drastically if the convertibles are in-the-money, may thus seem excessive. Still, the question remains: why would Uber complete the acquisition so precipitously. Lasfer argues that management may be trying to demonstrate Uber’s strength to investors, especially at the eve of rival Lyft’s IPO.
Additionally, given that the two ride-hailing operators hold significant market share in the region, it remains unsure if regulators will approve the transaction. The deal and subsequent lack of competition will most assuredly result in higher fares for customers and squeezed compensation for drivers, resulting in concerns for the region’s various regulatory bodies and uncertainty around the deal’s likelihood to be completed.
“Why is Uber doing this now? It may be trying to signal that it is strong and diversifying, diverting attention from the IPO of Lyft. It may even be signalling its potential stock price: $55.” - Meziane Lasfer, Cass Business School
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