Ahead of its highly anticipated initial public offering, Uber Technologies Inc has made a surprising announcement. It will take over regional rival Careem Networks in a $3.1 billion cash-and-stock deal that will see the company dominate the cab-hailing and ridesharing market in the Middle East and North Africa (MENA) region. Although talk about the deal was doing the rounds over the past year, most experts expected the deal to be announced after the IPO offering.
The acquisition, which is projected to close in the first quarter of 2020, will include $1.7 billion in notes convertible to stock and $1.4 billion in cash, Uber confirmed. The transaction, when completed, will be the largest such deal witnessed in the MENA technology industry, overshadowing Amazon's acquisition of Souq.
"This is an important moment for Uber as we continue to expand the strength of our platform around the world. With a proven ability to develop innovative local solutions, Careem has played a key role in shaping the future of urban mobility across the Middle East, becoming one of the most successful startups in the region," said Uber CEO, Dara Khosrowshahi, in a statement.
Tapping into the market potential
Upon completion of the deal, Careem's delivery, payments and mobility businesses across the MENA region will be acquired, including all the major markets – Saudi Arabia, Egypt, Pakistan, Jordan, and the UAE.
Careem and Uber, however, will continue to operate as independent brands in their respective regions after the merger, which also indicates that Careem will become a fully-owned subsidiary of Uber. Careem will operate with Mudassir Sheikha as its CEO but will have on its board three representatives from Uber and two from Careem.
"Joining forces with Uber will help us accelerate Careem's purpose of simplifying and improving the lives of people. The mobility and broader internet opportunity in the region is massive and untapped, and has the potential to leapfrog our region into the digital future," said Careem CEO and co-founder Mudassir Sheikha.
What's in it for investors and consumers?
With an IPO just around the corner, Uber's acquisition of Careem comes at an interesting time.
"It is unusual for private companies to engage in a takeover, particularly just before their initial public offerings (IPOs). Generally, they wait until they have their IPOs before acquiring other firms. The reason for this is that many studies show that the very basis for an IPO is to create paper money to finance the acquisition," said Meziane Lasfer, Professor of Finance at Cass Business School, which is part of City, University of London.
"The value that Uber is putting on Careem is so uncertain. The minimum is 3.1 billion, however, this valuation depends critically on the price of Uber shares after the IPO. For example, if the price of Uber goes up to $110 per share, it means the actual value of Careem is 4.8 billion dollars," Meziane Lasfer added.
While this seems to be a good move for Careem investors, it doesn't seem to bode well for Uber's shareholders who will lose money if the company trades at higher than $55.
Until now, consumers in countries such as the UAE had the option of choosing between transport authority cabs, which were marginally cheaper, and premium services such as Uber or Careem. With the merger, however, there's a concern growing about higher prices due to Uber's cab-hailing and ridesharing monopoly in the market.
Uber's global presence compared to other major players