Uber "Eats" Zomato's growth story
Uber Eats in India
Uber Eats started as a food delivery platform which displayed menus from all the restaurants that were partnered with the app and helped the users order their favorite dishes, much like what Zomato and Swiggy do.
However, soon after the launch, Uber Eats started to pick up huge losses. The losses for the company started to pile up even more after the COVID-induced lockdown. Furthermore, the losses of Uber Eats were tied to the overall losses that Uber was seeing.
During this time, the subsidiary of Uber had to resort to stringent measures like pay cuts and laying off employees. Uber Eats trimmed down its employee strength by 30% in hope that it would help the company get some gear, but when it failed, Uber thought of selling off its food delivery subsidiary.
Uber Eats - Zomato Deal
In January 2020, Zomato acquired Uber Eats India operations in a non-cash deal for ₹1,376 cr, excluding an amount of ₹248 cr payable towards GST. As part of the deal, Zomato issued 76,376 compulsorily convertible cumulative preference shares (CCCPS), each valued at ₹180,153, to Uber India. Subsequently, Uber India Systems transferred the CCCPS to Uber BV, which were later converted into 612,199,100 equity shares, or 9.19% stake, in Zomato.
Uber Eats wins the game
As soon as the Zomato listed on July 23, 2021, people began talking about the sudden surge of the market value of Uber stakes. The market value of the stakes Uber has in Zomato was announced at ₹ 9,000cr ($1.2 bn). This confused many as when they heard that Uber didn’t spend a single penny for such a fortune it made out of the Zomato IPO. Along with making over a billion dollars in Zomato’s IPO, Uber also resigned from Uber Eats last year, which was on the verge of being a liability. Uber has made 560% or 5.60x return on its investment in Zomato as the country’s food delivery start up ended Day 1 with a market cap of ₹98,849cr with the stock settling 65% higher at ₹126 against its issue price of ₹76. Therefore, it was truly a win-win decision for Uber!
While the deal has fetched gains for Uber, for Zomato the deal is a loss making one as it has written off ₹233 cr as impairment in its books. On 18 December 2020, Zomato raised $550mn in a funding round, following which, as per the agreement, the CCCPS were converted into 91,373 equity shares (currently 612 mn shares with a FV of ₹1). Zomato states in the DRHP that the fair valuation of the CCCPS, as on 18 December 2020, was ₹1,609 cr, even as it recorded a loss of ₹233 cr which was treated as an exceptional item in the restated consolidated P&L. Zomato posted a loss of ₹816 cr in FY21.
The Competition Commission of India (CCI) has issued a show cause notice to Zomato for failing to take approval of the regulator for the deal. Though Zomato has replied to the notice, the DRHP states that the CCI could impose a penalty of up to 1% of the combined entity’s turnover (₹1,994 cr as of FY21) or assets (₹8,704 cr as of FY21), whichever is higher. Effectively, the cost of acquisition of Uber Eats for Zomato will not be the ₹1,624 cr that it paid. If we are to club the impairment of ₹233 cr, the transaction cost increases to ₹1,857 cr, and if the CCI slaps a fine of ₹87 cr (1% of its assets), the effective cost of the transaction will spike up to ₹1,944 cr.
Uber Eats' Strategy
The divestiture of Uber eats from India is similar in nature to some of Uber’s prior deals when the company sold off regional operations to competitors such as Didi, Grab and Yandex in exchange for minority stakes in each business
During its Q3 earnings call in November 2019, Uber CEO Dara Khosrowshahi had said Uber aims to be “number one or number two” in all markets it operates in. If it isn't able to do that, it will withdraw.
The precedent of quitting markets where success is low has been the norm for Uber. In 2016, Uber left China after selling its business to market leader Didi Chuxing. The next year, it sold its business to Grab in southeast Asia. In 2018, it merged with Yandex in Russia. In September 2019, Uber Eats exited South Korea in the face of stiff competition.
In August 2019, analysts estimated that Uber was losing $3.36 on every order. They projected that the loss would shrink to $0.46 per order by 2024 but shared no timeline on when the business would turn profitable. India has remained a black spot, posting operating losses of Rs2,197 cr between August and December 2019.
One more similar strategy between Uber’s exit strategy from other markets and the food delivery segment in India is that the company bought a stake in a rival business to ensure it doesn’t completely miss out on the opportunity. Today, Uber’s holdings in Didi, Grab, and Yandex are collectively worth a cool $12.5 bn on paper, with at least $3 bn in gains so far.
In exchange for Uber Eats’s India operations, it picked up a 10% stake in Zomato, which commands 55% of India’s food-delivery market share. Uber’s shares were up around 7% on the day it announced the sale in India.
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