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Uber Withdraws From Russian Market, Merges Local Operations With Yandex

Courtesy of ZeroHedge. View original post here.

Uber and Yandex, the "Google of Russia", have agreed to merge their ride-sharing businesses in Russia and in five markets across Central Russia, a deal in which Uber cedes control of the market to the Moscow company after years of fierce competition. Diversified internet giant Yandex is the dominant player in Web search, maps and mobile navigation in the region.

The deal marks Uber’s second retreat from a major international market, and represents another pullback from Uber's breakneck global expansion, coming one year after it sold its China operations to Didi Chuxing a year ago. While the deal will allow the cash burning company to improve its margins by ending the price wars in the Russian market, it will further cap its growth potential, having lost two of the world's biggest markets. The deal also represents Uber’s biggest strategic move since the ousting of its controversial chief executive Travis Kalanick, who resigned last month after investor pressure and a string of crises at the $62.5bn company.

The quick details:

  • Uber will invest $225 million, Yandex putting $100 million into new, yet-to-be named venture, with Yandex emerging as the leading partner.
  • Uber will take a 36.6% stake woth $1.4 billion, Yandex will hold 59.3% in the pro forma company; The new business will be valued $3.725 billion.
  • Tigran Khudaverdyan, head of Yandex.Taxi in Russia, will become CEO of the combined company.
  • Uber and Yandex handle 35 million rides a month in Russia; new business to operate in Kazakhstan, Azerbaijan, Armenia, Belarus, Georgia
  • Deal expected to close in Q4 2017

The ownership stakes reflect how Yandex.Taxi is roughly twice the size of Uber in the region. As of June, Yandex.Taxi had an annual run rate of 285 million rides and gross bookings of $1.01 billion, while Uber had 134 million rides and $566 million in bookings, the companies said. Yandex.Taxi Chief Executive Tigran Khudaverdyan will become the CEO of the combined business and Yandex will consolidate the new company's results in its financial statements. Yandex will hold four board seats, while Uber holds three, they said.

Additionally, as part of the deal, Uber will contribute its UberEATS food delivery business in the six-country region to the new venture.

Uber was quick to note that the merger in Eastern Europe does not imply a strategy of further retrenchment elsewhere, and said that the terms of the deal make it a lucrative one, however with two major precedents of Uber withdrawing from loss making markets, it appears increasingly likely that Uber's new strategic focus is to limit cash burn and exit unprofitable markets, which will mean significant additional withdrawals in the future.

As a reminder, Uber sold its Chinese business to far larger local rival Didi Chuxing a year ago in return for Uber receiving a 17.5 percent stake in Didi which was then valued at $35 billion. While Uber no longer exists in China, the paper value of its stake in Didi has risen to around $8 billion from $6.1 billion, based on Didi's recent funding round valued at $50 billion. Maybe Uber can next pivot as a crowdsourced hedge fund.

Meanwhile, Uber reported in late May that its net loss (excluding stock options and other items) declined in the first quarter to $708 million from $991 million in the fourth quarter, and came a time of executive level turmoil, with Travis Kalanick recently stepping down as CEO after a series of sweeping scandals ricked the company in 2017.

As the FT notes, Russia was long a challenging market for Uber, a latecomer to a field dominated by Yandex Taxi that was never able to gain the upper hand. Yandex also had a key technical advantage because of Yandex Maps, as mapping technology is core for any transport service, whereas Uber had to rely on mapping data from outside vendors. Recently the two companies have been undercutting each other with deep subsidies as they tried to capture market share.

Going forward, Yandex and Uber will compete in Russia with rivals including Fasten-owned Rutaxi and Saturn, Maxim and Gett, the Israeli startup backed by German automaker Volkswagen.

In the end, this was the best option for Uber: in its deal with Didi, which was negotiated by the now departed head of business Emil Michael, Uber took a 20% stake and a board seat at Didi, as well as a $1bn investment from its former rival, in exchange for its China operations. In the Yandex deal, Uber will not only take a stake in the new Russian transport company but also have global app integration, so that users of both apps can access the services of the other.

“Not only is this partnership good news for our two companies, it’s also great for riders, drivers and cities across the region,” said Mr Gore-Coty. The new company would have had monthly gross bookings of about $131m in June.


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