Wheels might be falling off Uber-SoftBank deal, regulators get tough

SoftBank and Uber’s major shareholders are reportedly in deadlock over the terms of the Japanese conglomerates investment – a deal that seems crucial to Uber’s recovery. SoftBank wants to prevent other major shareholder from discussing the price of the stock between themselves – some are calling this a gag order that could allow SoftBank to drive down the share price. This has led to resistance from those current shareholders to agree to the apparent $10bn deal.

Uber is still a private company, whose major investors include Alphabet, Microsoft and private equity giant BlackRock. The SoftBank-led consortium must buy at least 14% of Uber’s shares from for the deal to proceed, so, if not enough shareholders accept the tender offer at the price that SoftBank names, then the deal would be called off.

The new investors, which include SoftBank, Dragoneer and General Atlantic, will purchase between $1bn and $1.25bn of new preferred shares from Uber. They will pay the same price of $48.77 that buyers paid last year, which implies a valuation of $68bn. Those preferred shares will come with a high degree of investment guarantees, making them more valuable than Uber’s common stock – hence the tension.

However, the bulk of the transaction, likely between $5bn and $8bn, will be a purchase of shares from existing shareholders through a tender offer, which will take place at a lower price, with a likely a valuation for the company of between $48bn and $51bn. It is the undisclosed price of the existing shares that appears to be causing the most tension in the negotiations.

Failure to secure the investment to get the deal with SoftBank done will mean Uber misses out on the $1bn in new investment. Failure to secure a deal would also mean the company is stuck with its current crop of shareholders, many of which will be fatigued by a year of bad news for the company.

SoftBank is already invested in a number of Uber’s competitors in Asia and has even held introductory talks with competitor Lyft. If SoftBank can’t manage to finalize a deal with Uber’s major shareholders, don’t be surprised if it initiates talks with Lyft.

The materials of the SoftBank deal are less about investment, and more about who owns what stake in the future of Uber. Although SoftBank is considered an activist investor, its CEO Masayoshi Son has been known in the past to directly call the regional branch managers of the US MNO Sprint, after poor sales figures for a quarter – suggesting he would be quite hands-on with the company.

Another element to consider in the deal is the long-term goal of an IPO in the next 18-36 months, that could promise higher returns for investors than those currently offered by SoftBank. Venture-capital firm Benchmark, which holds a 13% stake in Uber, recently tweeted that it could be comfortably worth over $100bn within a few years. Benchmark has met with SoftBank but has been unable to reach an agreement on Uber’s valuation.

Over the past year, Uber’s has seen its market position and potential future value derailed by a series of scandals that could allow other ride hailing services like Lyft, who secured a $1bn investment from Alphabet this month, the opportunity to claw a more significant share of the mobile ride hailing service market in the future.

Lyft has been steadily gaining market share from Uber in recent months, in the markets in which it competes with the dominant ride-sharing service, mostly due to Uber’s spate of well-documented bad PR episodes. It has launched a new marketing campaign, and the cash injection would allow it to compete more aggressively in driver subsidies to enable pricing wars with Uber – a rival that has been better funded.

Uber’s troubles are numerable, from losing its operating license in London, a board room battle between new CEO Khosrowshahi and former CEO Travis Kalanick, lawsuit concerning the company’s autonomous driving technology and allegations of a sexist culture inside the company – all of which SoftBank will use in its negotiations with the major shareholders to talk down the value of their shares.

Issues with regulators are becoming a further sticking point for Uber, this month announcing that it would be pulling out of Quebec. After legislators in the region had ruled that Uber would have to ensure all its drivers had received 35 hours of training and have their vehicles inspected annually, the same as all other taxi companies. Uber objects, with the central tension here being that Uber sees itself as a technology company and not a taxi company, arguing the legislation is unjustified.

On top of this, Uber could be facing a legislative clampdown of its activities in Brazil, which could potentially render its business model unworkable in the country. Brazil is currently Uber’s second largest market after the US, meaning the company would be majorly affected by any knock to its business in the country.

Brazil’s Senate on Tuesday voted majorly in favor to fast track a bill that would regulate Uber and other on-demand transport apps such as Cabify 99, and Lady Driver as taxi services rather than technology companies – the effect of which would increase the bureaucracy the companies would be faced with. The next vote to confirm the decision will take place on October the 31st.

Uber has become hugely popular in Brazil, as it fills a void left by what is claimed to be a hugely inadequate public transport service in the country. The rise of mobile ride hailing has meant that the revenues from unreliable mass transit have slid dramatically. Legislators appear to use an increasingly bureaucratic regulatory climate for ride hailing services as a means to claw back revenues for public transit.