Your browser is not supported. Please update it.

5 January 2018

SoftBank closes out discount Uber deal, EU ruling adds a blow

By Jack Vernon

A consortium led by SoftBank has reached an agreement to acquire more than 17% of Uber for about $9bn, after shareholders elected to sell their shares at a discounted price. The deal exposed a shortfall in shareholder confidence in the group, as the offering from SoftBank was oversubscribed by existing shareholders. However, Uber has slumped to a $49bn valuation – down some 30%.

The deal has been confirmed just a few weeks after the European Court of Justice (ECJ) dealt Uber a blow, by reclassifying it as a transport services company, as opposed to what it currently considers itself – an “information society service”. The case arose after Uber was told to obey local taxi rules in Barcelona.

The ECJ found that Uber had “decisive influence” over the relationship between passengers and drivers, and this meant it was inherently providing a transport service. The decision means that the local transport service laws in the 28 European member states will now apply to Uber, potentially increasing its costs. The impact of the ECJ ruling might have further helped SoftBank in negotiating down the price of shares in Uber.

SoftBank’s Vision Fund will purchase 15% of Uber’s shares, by purchasing a combination of new and existing shares, for $7.7bn, making it the largest Uber shareholder. The other members of the consortium, which includes Dragoneer, Tencent, TPG and Sequoia, will together invest roughly $1bn and own about 2.5% of Uber shares. Collectively, the consortium will own about 17.5% of Uber at the deal’s closing.

The group will invest $1.25bn into the company by buying new shares in Uber that value it at $70bn – equivalent with a funding round that took place earlier last year. However, the group will also buy a second larger tranche of discounted shares, from Uber’s existing shareholders, at the price of $32.93 per share, valuing the company at $49bn, 30% lower than previous valuations.

Successive scandals at Uber, seem to have knocked the confidence of existing investors in the company, many shareholders taking the option to cash out on their gains, rather than wait for the expected IPO in 2019. The low-ball offer by SoftBank was reportedly oversubscribed, according to those familiar with the deal – meaning more investors want to exit.

Contributing to the shareholders’ eagerness to sell was a disclosure of mounting losses, which reached $1.5bn in Q3 2017 – as well as the emergence of a data breach in 2016 that was covered up for more than a year. The data breach exposed the personal details of some 57m riders and driver accounts. Lawsuits have already been filed against Uber over the breach.

The deal will trigger sweeping governance changes that will cement new CEO Dara Khosrowshahi’s control over Uber – so that he can prepare the company for the targeted October 2019 IPO. All super-voting rights will be removed, and Uber’s board will be expanded to 17 seats, of which the consortium will get to appoint two new seats.

Uber is a complex beast, with some 600 global markets, deploying a mixture of strategies across these divisions. The SoftBank Vision fund has already taken positions in ride hailing services Didi Chuxing and Ola, direct competitors to Uber outside of its native US market. Due it its multiple investments into the ride haling service market, SoftBank is perhaps best placed to understand what is required for Uber to reach its potential.

Didi has increased its direct competition with Uber, purchasing Brazilian ride-sharing company 99, for a rumored $1bn, as it extends into Latin America. Brazil was previously Uber’s second largest market outside of the US.

Commenting on the ECJ’s ruling, Uber said that the case will not make any difference to its operations in Europe, as it already operates under transportation legislation in many countries in the region. Similar rulings have been made by several regulators globally such as in Brazil and Quebec, which have impacted negatively on Uber. In the case of Quebec, it caused Uber to pull out of the area after the ruling. It is still unclear how the ruling will affect the company, but for now Uber is putting on a brave face.

Khosrowshahi said publicly that it is appropriate for services like Uber to be regulated. This marks a change in tone and a more conciliatory approach from the Uber, which in the past, often resisted cooperating with regulators – and actively avoided and interfered with them, as seen in the infamous Greyball application.

The ruling sets a precedent in Europe that will likely mean any of Uber’s competitors will also be classified as transport service companies. It also sets a broader precedent in favor of reclassifying technology companies who might try and portray themselves as simply being an app.

Uber is yet to make much progress in improving its standing with regulators. Although the group successfully appealed against Transport for London revoking its license earlier this year, meaning Uber can continue to operate in London. However, the company was told last month that the license appeal could take years to settle, by London mayor Sadiq Khan.