Uber sells China unit to local rival Didi Chuxing

Landmark deal will end the fierce and costly battle between the two rival ride-hailing groups for market share in China.

Global ride-hailing company Uber Technologies has agreed to sell its China business to Didi Chunxing, China’s dominant homegrown player, in a deal that will end the fierce and costly battle between the two companies for market share in China.

China’s largest ride-hailing company will acquire all of Uber China’s operations and run it as an independent entity. In exchange, Uber will receive a 5.89% equity stake in the combined entity, Didi said in a statement on Monday. In addition, investors of Uber China - including domestic search giant Baidu and travel conglomerate HNA - will receive a 2.3% economic interest in the combined group.

Travis Kalanick, chief executive of San Francisco-based Uber, and Cheng Wei, founder of Beijing-based Didi, will each join the respective company's board following the transaction.

The tie-up would put the valuation of the newly merged company at about $35 billion, combining Didi’s most recent valuation of $28 billion and Uber China’s $7 billion valuation, according to one person familiar with the issue.

“Didi Chuxing and Uber have learned a lot from each other through the competition over the past two years in China’s burgeoning new economy,” Didi’s Cheng said in the statement. “Teaming up with Uber will set the mobile transportation industry on a healthier, more sustainable path of growth at a higher level.”

Monday’s union marks an end to Uber’s two-year effort to penetrate the Chinese market, where Uber and Didi have splurged billions of dollars to battle out for bigger market share by aggressively providing subsidies to drivers and passengers.

“Uber and Didi Chuxing are investing billions of dollars in China, and both companies have yet to turn a profit there,” Uber’s Kalanick wrote in a draft blog post seen by FinanceAsia. “Getting to profitability is the only way to build a sustainable business that can best serve Chinese riders, drivers and cities over the long term.”

Uber spent about $1 billion on subsidies to expand its footprint in China last year, while Didi has recently been offering subsidies up to $200 million each month to maintain its dominance, said the person.

According to Beijing-based consultancy firm Analysys International, Didi took up nearly 80% of China’s private-car ride-hailing market last year, compared to Uber China’s 11%.

Unsurprisingly, both companies’ cash-burning business model had put them on a fundraising spree, seeking fresh capital from external investors, who later have increased the pressure on them to halt the costly subsidy battle.

“Both Didi and Uber China have already spent loads of capital on the Chinese market, thanks to the fierce competition over the past few years. Investors are keen to end such a cut-throat price war,” Zhang Xu, a transportation analyst at Analysys International, told FinanceAsia.

Didi, already backed by Chinese internet groups Alibaba and Tencent, closed a $7.3 billion fundraising in June, which included $4.5 billion equity and $2.8 billion in debt. That came one month after it had secured $1 billion from Apple.

Meanwhile, Uber said in the same month it had raised $3.5 billion from Saudi Arabia’s sovereign wealth fund as part of its latest round of funding, which totaled more than $5 billion and valued the venture-backed firm at $62.5 billion.

The merger is reminiscent of a similar tie-up that brought together two domestic taxi-hailing platforms backed separately by Alibaba and Tencent in February 2015. Didi Dache and Kuaidi Dache were merged to create Didi Kuaidi, later renamed Didi Chuxing, in an effort to compete more effectively against Uber.

Monday’s deal also comes after China last week formally legalized the online car-hailing business, which used to operate in a grey area across the country. The new regulations, which will come into force in November, ban companies running such services below cost.

The deal, subject to government approval, is likely to put Didi under the regulatory spotlight, according to Peking University law professor Deng Feng.

“China’s online car-hailing market is in a transitional period. If this merger helps [Didi] further gain a monopolistic position, the Chinese government might come up with other policies” to counter its dominance, he told FinanceAsia.

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