SoftBank mulls Uber stake, for unity in incestuous ride-sharing market

According to reports in the WSJ, SoftBank has begun talks with Uber to take a multi-billion dollar majority stake in the embattled ride-sharing platform – which has suffered a barrage of (mostly deserved) bad press in recent months. If true, SoftBank will be continuing its form of opportune investments, which it best displayed with its acquisition of ARM – leaping in with a bid as the British silicon institution was rocked by forex declines. This is an expansion on previous ride-sharing investments, in Didi Chuxing and Grab.

SoftBank was a surprise bidder for ARM, and seemed motivated to pounce based on the fall in the value of Sterling, as a favorable exchange rate was blessed to them in the wake of the Brexit referendum. With Uber, SoftBank will be motivated by the damage that Uber’s multiple recent controversies have done to its valuation – which was once sky high, but will now have been taken down a peg or two, thanks to leadership turnover in the wake of the Holder report.

To date, Uber has raised around $12bn from some 500 investors, and its most recent valuation put it at around $60bn. Neither party is commenting on the deal, and it follows earlier reports from Bloomberg, which said that SoftBank was looking to acquire shares from Uber investors that were concerned about the company’s future.

SoftBank is apparently only willing to invest after the appointment of the new Uber CEO – after founding CEO Travis Kalanick was forced to resign by investors – the same investors (led by Benchmark) who objected to his insistence that investors don’t cash-out of the struggling company. The search for new leadership, to replace a veritable void at the company, has been ongoing, with little interest.

That Bloomberg report also cited a “person close to the company,” who said that SoftBank had no plans to invest in Uber, and so if that initial report was true and the new WSJ report is also true, there has been a notable change of heart at SoftBank. However, this leak is likely to have upset SoftBank, given that it has a pretty good history keeping a tight lid on such discussions.

SoftBank’s rumored talks come only two days after it jointly invested $2bn in Grab, a rival to Uber in Southeast Asia, in a round that was also joined by existing investor Didi Chuxing – another Uber rival, that successfully forced Uber out of China, and which SoftBank holds an investment stake. SoftBank has also invested in Uber’s Indian rival, Ola. In Russia, Uber also agreed to offload its operations to Yandex (the Russian search engine incumbent) via a minority control merger. Uber had increased its SEA investments after crashing out of China.

So with SoftBank’s ride-sharing stakes in Asia, adjacent to its home market in Japan, taking control of Uber and guiding it to broker deals with the local rivals could let SoftBank leap to the fore in the ride-sharing race. The Japanese business culture seems very at-odds with the ‘brofessional’ culture that was rife at Uber (other terms such as misogynistic have also been leveled at its corporate culture) – which could come to a clash.

There are some major differences between the aforementioned ARM acquisition, which cost SoftBank $32bn, and SoftBank’s apparent ride-sharing strategy. Most notably is the financial viability of ARM, a silicon design house that effectively prints money, and Uber – which has had to heavily subsidize its trips in order to compete in new markets, which proved a disaster in China.

In addition, Uber’s secondary shareholder valuation has dropped to $50bn – a long way from the $68bn that its primary investors have assigned to their shares. In the secondary markets, Uber was once something worth paying a premium for, but this is no longer the case.

TechCrunch reports, thanks to insider sources, says that Uber’s US rival Lyft is enjoying a surge in value – with the secondary market discount falling from its typical 20% figure to between 9-13%, reflective of a rise in demand. Following on from a $600m funding round, Lyft is now valued at around $7.5bn – a fraction of Uber’s current worth.

It should be noted that TechCrunch spoke to a source that saw bid indications for Uber shares that valued it at $40bn. Uber’s aforementioned restrictions on secondary trading, unpopular with shareholders, means that such valuations are based on a pretty small sample size, however. The findings of the Waymo lawsuit, and its ongoing problems with worker classifications and subsequent tax and benefits are also likely to further damage Uber’s valuation.

As Uber falls, the market is ripe for Lyft to grow, but it is still pertinent to remind readers that neither company has yet turned a profit – such is the uphill climb they must first make, building their platforms and driver footprints. In 2016, Uber reported a $2.8bn loss, as it tried to fuel expansion – on net revenues of $6.5bn, or a loss margin of 43%.

While its quarterly revenues surged, to $2.9bn in Q4 2016 (about 3x that of Q1 2016), it hasn’t announced any results for Q1 2017 – when the scandals came to the surface. Uber apparently has $7bn in cash and $2.3bn in credit left, meaning that it has around three years of operational expenses until it needs to raise more funding.