Why Uber may buy its big rival in the Middle East

Why Uber may buy its big rival in the Middle East
Copyright 2019 CNN

Uber may be close to spending billions of dollars to buy its big rival in the Middle East.

The company is reportedly in talks to acquire Careem, a startup based in Dubai that has grown into the biggest ride-hailing app in the Middle East since it was founded in 2012.

Careem now has more than 30 million customers and its local knowledge and home-field advantage have made life tough for Uber since it entered the market in 2013.

The reported deal could value Careem at around $3 billion. Uber and Careem declined to comment. Careem was valued at more than $2 billion at its last funding round in October.

Uber has a mixed track record in international markets. Over the last three years it has retreated from China, Russia and eight Southeast Asian countries.

But Uber has been playing up its global ambitions as it prepares for an IPO, and is likely to want to shore up its position in growth markets such as the Middle East. CFO Nelson Chai said in November that the company had invested in “high-potential markets in India and the Middle East where we continue to solidify our leadership position.”

Cutting its losses

A merger with Careem could help it reduce its losses.

“In this market, a merger usually is a signal that one or both companies are suffering from the costs of competition,” said Michael Ramsey, senior director analyst at consulting firm Gartner. “A merger, theoretically, reduces the cost of keeping drivers. There are some benefits of scale for using a single back-end, but mostly it is a reduction in competition.”

Uber said last month it had lost $1.8 billion in 2018. The company, which is the most highly-valued US startup, is expected to go public this year.

Careem may also prefer a deal before an Uber IPO which could raise billions for its competitor.

“Careem would likely lean more toward an acquisition by Uber to protect value created, and avoid further losses once Uber has more firepower as a result of its IPO,” said Khaldoon Tabaza, founder of Dubai-based startup operating firm, iMena Group.

But regional instability could raise risks for Uber, he added. Careem operates in 22 cities in Pakistan, where a recent spike in tension with India has raised concerns of renewed conflict between the powerful neighbors.

Partners in common

A takeover could be pushed by investors who have backed both companies.

In 2017, Daimler invested in Careem a few months after it announced it would work with Uber to introduce self-driving cars on its network.

The Saudi government is riding both horses, paying $100 million for a stake in Careem in 2016 and pouring $3.5 billion, the most from a single investor, into Uber the same year.

Combining the two apps would give Uber complete dominance of the Middle East market, but some analysts question whether such a move would allow it to raise fares and boost its bottom line.

“The bigger issue is that even with dominance, there is no evidence that any of these companies can actually earn sustainable profits while providing the level of fares and car availability that made them popular,” said Hubert Horan, an independent transportation consultant.

A deal may also be hindered by competing interests.

One of Careem’s top investors is Japan’s biggest e-commerce company, Ratuken, which also owns 13% of Lyft — another Uber rival. Rakuten declined to comment.

Will Careem go the way of Souq?

But Saudi Arabia’s Kingdom Holding, which also holds stakes in Careem and Lyft, has signaled it could back a deal between Careem and Uber. Kingdom Holding CEO Talal Al Maiman told Bloomberg in January that his company would be “supportive” of a merger of the two.

Didi Chuxing, which forced Uber out of China, also owns a stake in Careem. It also declined to comment.

If a sale were to go through, it would be the second takeover of a Middle East unicorn after Amazon bought e-commerce startup Souq in 2017.

“Regional stakeholders were hoping for Careem to further grow and become an acquirer, rather than fold into Uber,” said Tabaza of iMena. “However, an acquisition by Uber could also be viewed positively as a sign of the attractiveness and maturity of regional markets,” he added.