Uber’s Middle East Ride Comes with Surge Pricing

(Bloomberg Opinion) -- Uber Technologies Inc. has executed a neat piece of M&A ahead of its initial public offering – but it’s had to pay for it.

The U.S. ride-hailing behemoth has agreed to pay $3.1 billion for Middle Eastern peer Careem Networks FZ. That’s about 50 percent more than the valuation reportedly put on the target in its October funding round.

For Uber, the prize is the proof that it still can secure a dominant position in an emerging market following a series of deals that have seen it retreat to the role of junior partner.

The Careem journey is impressive. For its ex-McKinsey & Co. founders and venture capital investors, the deal delivers an unusually large exit price for the region from a company that’s only seven years old.

The attraction is Careem’s local know-how. It has shown a knack for spotting customer needs and responding fast – by, for example, combining ride-hailing technology with the ability to settle up in cash. It has since developed a payments arm which could be an interesting business in its own right. Small wonder, then, that Uber is planning to keep Careem’s brand and CEO. But it’s not clear how the two operations will co-exist. The implication is that Uber will seek to carve the market into distinct segments. Maintaining Careem’s identity may also give regulators a pretext to approve a transaction that ends a regional duopoly.

Careem doesn’t disclose financials. Given the huge jump from the last funding round, it’s likely the transaction was struck at a premium to the prevailing gross merchandise multiple in this industry. Nevertheless, Uber can bring plausible synergies to bear to justify the top up. The pair will no longer have to bid against each for drivers, customers and scarce engineers. There should be some technology and back-office savings too, although maintaining two brands will limit the scope for economies of scale in marketing.

Then there’s the broader strategic benefit in supporting Uber’s equity story before its IPO. The deal establishes the Middle East as another avenue of growth, one where Uber has full ownership and control rather than riding as a passenger with a minority stake.

The acquisition looks like an early use of the proceeds from Uber’s expected IPO: $1.4 billion will be in cash and $1.7 billion will be in a bond that converts into Uber stock worth $55. The precise value of that bond depends a lot on when that conversion takes place.

Uber clearly had some negotiating power as it has been able to secure full ownership, but it has paid up. Doubtless Careem could have continued operating solo, and didn’t obviously need a deal. But that is often the best time to sell.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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