Uber’s $3.1bn Acquisition of Middle Eastern rival, Careem Networks FZ

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.