Last month rumours were making rounds on the internet that Uber was exploring options to exit the Indian market. While the debates and discussion related to Uber’s possible exit were far from over, last week, the internet was abuzz once again with media reports claiming that Uber and Ola were engaged in a discussion exploring merger options. While Ola was quick to label such reports ‘absolute rubbish‘, Uber rejected any such possibility in the future. Nevertheless, after four days, Uber has given a new reason to analysts to dig deep into the company’s latest decision.
Uber has made a move leading to many speculations, including its existence in India.
Why Is Uber Selling Stake In Zomato?
According to people familiar with the matter, Uber has decided to sell its 7.8 percent stake in restaurant aggregator Zomato.
The ride-hailing giant Uber obtained this stake after it sold Uber Eat’s India business to Zomato in January 2020. The non-cash deal was valued at Rs 1,376 cr then.
A term sheet states that 612 million shares of Zomato will be up for sale at Rs 48 – Rs 54 apiece. The share sale could fetch Rs 2,939 crore at the lowest end, while the maximum deal size could reach Rs 3,305 crore at the highest end. The block transaction is expected to occur on Wednesday.
Zomato shares closed last at Rs 55.6 per share, an increase of 20% over the previous day.
However, the term sheet didn’t include the seller’s name.
The block contains the same number of shares of Zomato held by Uber.
California-based Uber could enjoy returns between 2.14x to 2.4x depending on the size of its Zomato deal. The decision to offload the entire stake of Zomato came Within a week after Zomato’s post-IPO lock-in period ended.
BofA Securities is solely responsible for the sale of shares.
Post-IPO Lock-in Period: Zomato on free fall
After the expiration of the lock-in period, Zomato shares experienced wild swings. The stock fell to Rs 40.6, the lowest in its history, last week and has since rebounded by more than 35%. However, according to market players, Uber’s decision to offload its entire stake in one go could put more pressure on the stock which is already down 62% since its listing.
Zomato shares are currently down 27% compared to its IPO price at Rs 76 per share. However, the stock more than doubled in value after its listing to reach a record high at Rs.169.
Zomato raised Rs 9,000 crore through its first share sale. Info Edge, an early-stage investor, had sold a portion of its stake in Zomato worth Rs 375 crore during the IPO.
Zomato does not have a known promoter. Moreover, public shareholding includes the shareholding of all investors and their founders. As a result, experts believe that there could be an overhang in the stock of large investors who are disinvesting.
At the end of the June 2022 quarter, China’s Ant Financials and Alipay held a 6.99% and 7.1% stake, respectively, in Zomato. Info Edge’s shareholding was down to 15.17 percent. Tiger Global’s Internet Fund had 5.11 percent, and Sequoia Capital had 5.1 percent.
Uber on exit route in India?
The timing of Uber’s move for Zomato’s holding has surprised many. It has given rise to speculation about Uber looking to exit the Indian market by selling or merging its operations with Ola. Both the companies, however, have refuted such claims.
In spite of stock market analysts giving a ‘buy’ call to Zomato and expecting the value to skyrocket to Rs 100 in the coming months, Uber’s decision to liquidate its investment now is quite surprising. Zomato stock was recently trading at an all-time low, albeit showing signs of recovery by jumping up 20% on Tuesday.
The decision of Uber to sell Zomato’s stake can also have a far-reaching impact. The reports on the possibility of the company exiting the Indian market would also trigger a debate on the profitability of the app-based cab hiring business model in India. Uber and Ola have created a duopoly in the market and have engaged in cut-throat competition for the last few years. However, Uber’s disappointing performance in the stock market and Ola’s decision to scrape its plan for IPO in the near future have created a lot of ambiguity on the sustainability and profitability of the business model. Both Ola and Uber have started looking beyond the app-based cab-booking model without bringing it on the road to profitability. Ola has shifted its focus more on the electric vehicle manufacturing business, while Uber is also engaged in similar kinds of stints.
What Uber is up to with its decision to sell its stake in Zomato at a time when the possibility of doubling its profit is high could be anybody’s guess. Besides, the decision leaves more questions than answers. Is Uber’s plan to redefine its strategy in India already set in motion? Is it looking to channel its resource and investment to markets where the company is either already in profit or soon to become profitable? Or have they given up on Zomato and no longer see it as a promising investment to hold on to?
Whatever the case may be, the move will have a far-reaching impact on both Zomato and Ola. It’s just a matter of time before we start seeing the reciprocal effects of the same.