Turns out, Uber Shareholders Are Eager to Sell at 30% Discount

Big pain and some relief for Saudi Arabia.

Softbank, an acquisitive junk-rated Japanese holding company that also owns about 80% of Sprint, has been preparing for months to buy a large stake in Uber. At the end of November, it launched a tender offer to buy enough shares from investors and employees to give it a 14% stake. It dangled out a price of $33 a share, which valued Uber at $48 billion – a 30% discount from Uber’s “valuation” of $69 billion, which had been established behind closed doors during the last fund-raising round.

The offer at a $48-billion valuation is even lower than Uber’s valuation back in June 2015 of $51 billion.

When the tender offer was started, there was uncertainty if enough sellers would be willing to dump their shares at this discount. The other option for them would be to hold out until the IPO, in the hopes for a better deal. The tender offer expired today at noon Pacific Time.

Turns out, there are plenty of eager sellers – despite any dreams of a blistering IPO: The tendered shares amount to about 20% of the company’s equity, “people familiar with the matter” told the Wall Street Journal. But SoftBank will likely acquire only a 15% stake, “the people said.”

Other members of the consortium SoftBank is leading – including Dragoneer Investment Group and Tencent Holdings – are likely to buy some but not all of the remaining tendered shares.

This deal will not raise money for Uber itself but will allow employees and early investors to cash out some of their holdings – at a steep discount.

But to maintain the illusion of the previous “valuation” of $69 billion – which is critical for a properly hyped future IPO – SoftBank will also make a $1-billion direct investment into Uber at the $69-billion “valuation,” as part of the deal. Since startup “valuations” are based on the price paid during fund-raising, this $1-billion deal forms Uber’s new “valuation,” the same as the prior one. So the “valuation” illusion remains intact.

Both deals combined – the $7-billion tender offer and the $1-billion direct investment – will make SoftBank one of Uber’s largest shareholders.

SoftBank already owns major stakes in other rideshare startups, including Didi Chuxing, the largest rideshare company in China; Grab, a major rideshare company in Southeast Asia; Ola, the largest rideshare company in India, slightly ahead of Uber; and 99, the largest rideshare company in Brazil. So SoftBank is serious about getting into this business on a global scale.

But all rideshare companies are competing with each other, with taxis, rental cars, mass transit, and other modes of transportation on service and low fares, and they’re competing with each other to rope in drivers by offering them incentives. The plan is to dominate the markets. And all of them are losing money hand over fist.

The chart below shows what quarterly “adjusted” losses look like for Uber. Actual losses under GAAP would be much larger since the costs of employee stock compensation, interest, taxes, depreciation, and amortization have been stripped out of the figures that Uber shows the media:

So maybe it was a good time to sell at a 30% discount.

Other investors – those that bought in at the $69 billion valuation or at any valuation above $48 billion – are licking their wounds, including Saudi Arabia’s state-owned Public Investment Fund, which had made one of its biggest-ever forays into a privately held startup when it invested $3.5 billion in Uber in mid-2016 at a $62.5 billion valuation. The fund is now sitting on an unofficial paper loss of 23%.

This makes SoftBank’s $1-billion direct investment at a $69-billion valuation so important: it allows the pretense of that $69-billion valuation to continue for now.

The SoftBank deal also comes with reforms of Uber’s corporate governance. That may not be a bad thing considering the slew of scandals, lawsuits, and regulatory actions Uber is struggling with in its markets around the globe: Six directors will be added. Two of them will be from SoftBank.

The deal will also curtail the growing voting power by former CEO and now hot potato Travis Kalanick. Under Uber’s repurchase agreement, employees who sold even part of their shares back to the company had to give the voting rights of all of their shares to him. After the SoftBank deal finalizes, voting rights for all investors will be expanded, and his shares will no longer include the additional voting power.

This sort of thing only happens during the late stage of a bubble. Read… I’m in Awe of How Far the Scams & Stupidities around “Blockchain Stocks” are Going

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  29 comments for “Turns out, Uber Shareholders Are Eager to Sell at 30% Discount

  1. Michael
    Dec 28, 2017 at 9:29 pm

    Didn’t SoftBank also give Theranos a bailout? The reckless abandon at which “money” is being spread about tells you all you need to know.

    • Eric Barrett
      Dec 29, 2017 at 12:37 am

      What a great comment.

    • fozzie
      Dec 29, 2017 at 2:26 am

      “Didn’t SoftBank also give Theranos a bailout?”

      SoftBank owned Fortress Investment Group lent $100 million to Theranos, with their patent portfolio as collateral. Even though Theranos is a fraud I guess someone saw value in their patents.

      As for this deal with Uber, employees will finally be able to cash in on their options. What a great example of “golden handcuffs” – If an employee quit they’d have to come up with considerable cash to exercise their options before expiration and realize the tax consequences. Then nervously await a future IPO to where they could sell their shares.

      • junior_kai
        Dec 30, 2017 at 5:57 pm

        Maybe this is a deep state controlled fund, possibly using some of satoshi nakamotos stash to bail out deep staters. Theranos BoD’s definitely fits the bill.

  2. JA
    Dec 28, 2017 at 11:23 pm

    The CEO of Softbank, Masayoshi Son, was able to create a $100 Billion tech investment fund. He talked about wanting this fund to have $900 Billion! Wow. I wonder who is providing all this money?

    Seems like we are slowly marching to a world where a few companies will dominate each industry. We are seeing this with Disney buying up much of that industry. This feels troubling to me.

    • MC01
      Dec 29, 2017 at 3:32 am

      SoftBank’s Vision Fund is a strange beast.
      The bulk of the $93 billion (last SEC filing), or $45 billion, was provided by Saudi Arabia’s Public Investment Fund, raising some interesting concerns about the same fund’s present involvement in Uber.
      SoftBank contributed $28 billion through their own investment arm (SoftBank Capital) and the Abu Dhabi government $25 billion through their own investment fund. The rest of the capital was chipped in mainly by hi-tech investors: Apple’s Japanese subsidiary, Sharp, Foxconn and Qualcomm.
      This is a highly unusual fund which has caused a lot of concerns this year. Leaving aside their highly leveraged structure (to which Mizuho Bank is heavily exposed), the strangest thing about this fund is that Mr Son has final saying on all deals. Everybody else, including the Saudi government, is basically a junior partner.

      This year SoftBank has beaten all hi-tech competitors in the frenzied M&A landscape: they beat Qualcomm, they beat Salesforce and even the M&A king himself, Intel.
      Present SoftBank president and Mr Son’s chief financial strategist and advisor, Nikesh Arora, has honestly said their investment strategy aims at the “large check marketplace”. The $4 billion they poured into Nvidia this year are a good example.

      However not all is good news. After briefly touching y10,000 in late October, SoftBank shares have been on a continous slide ever since, and this is despite the Nikkei 225’s excellent performances. Today was no different: not everybody likes this deal.
      Like Steinhoff International this is a lesson to all those who keep on saying that “stocks can only go up”: indexes only tell half the story.

  3. William Smith
    Dec 29, 2017 at 12:21 am

    In the past there were actual real innovations such as the radio, telephone, penicillin, player piano, integrated circuits, incandescent globe, electricity, the wheel etc. Now they think that some stupid app from a company that screws its employees (by gig-economyfying them) is some great earth shattering innovation. These moronic “investors” wouldn’t know what “innovative” was if they fell over it and it got up and bit them on the rear end. I bet that somewhere in some small lab there is the next *real* innovation, but it doesn’t get noticed because it is too far ahead of its time and it doesn’t put on a show for the banksters and the dumbvestors that the likes of Uber or Theranos does/did. More dollars than sense these dimwits and the advance of humanity is held hostage to vacuous smoke and mirrors razzle dazzle required by the morons who somehow find themselves in charge of the money.

    • Hiho
      Dec 29, 2017 at 1:37 am

      Great comment.

    • Lee X
      Dec 29, 2017 at 10:02 am

      May I add, most excellent comment!

    • Gandalf
      Dec 29, 2017 at 9:06 pm

      Well, actually, it’s more complicated than that.

      In the “good old days”, if you were a poorly educated high school dropout with a not so great work record, you could still easily get a job in a factory, or, like Lee Harvey Oswald, as a simple laborer working in a school book depository. People in rural areas could still work as laborers in all sorts of farming and forestry related industries

      All of the greatness of that era, a la the MAGA wishful thinking, by the way, was because the U.S. was the ONLY industrialized nation left on this planet after WWII that had not been bombed into dust, or become bankrupt, as a result of the war. We did the most of that bombing and bankrupting, but that is an entirely longer discussion. America was great and jobs were plentiful only because for 30 years after WWII, we had no serious industrial competitors anywhere on Planet Earth.

      All those jobs have gone away however, thanks to gigantic levels of automation in factories and farming industry, as well as globalization. So what’s left?

      There is still a need for low skilled laborers in the farming industries, e.g., picking fruit and crops and milking cows and the like, but rural white people don’t want to do that anymore, and Trump has successfully scared off the illegal immigrant labor, so those industries are suffering from a labor shortage. Really. It’s true.

      Most Americans now live in the cities anyway, and if you are a poorly educated person, or just somebody with a not so great work record, or happened to have gotten an expensive college degree in a useless or unemployable major, what do you do? If you are OK with criminal activity, you go into the drug trade or prostitution, which require very little talent or skill and is easy to get into.

      But, otherwise, if you, like nearly most Americans, happen to have a car, and still have managed to stay out of jail, you could …. sign up for Uber! Or Lyft, or whatever.

      You were probably ferrying around your equally unemployed, but car-less friends for free anyway, you might else well start getting paid for it.

      So, actually, Uber is actually a brilliant idea, one that succeeded largely because of the massive current socioeconomic and technological upheavals of our times.

      • victor
        Dec 30, 2017 at 3:00 pm

        @ Gendalf Not bad except Uber helped finance many of these cars, so they were not just people in their old clunker driving around mixed in with Uber subsidizing low fares to beat out competition and continually losing money because of this. I do agree with you though Uber is almost like a government sponsored make work program which is good, but it is money losing enterprise.

  4. Javert Chip
    Dec 29, 2017 at 1:17 am

    I guess if you have enough money to invest, you have to diversify, even if that means making some apparently crazy bets (theory: todays crazy may be the next Google).

    Just once I’d like to see a 2-3 page PowerPoint that shows a credible path to profitability for Uber (“yada yada disrupt industry blah blah blah driverless cars” doesn’t count as a credible plan).

    $7B is some serious money to watch circle the drain.

    • AV8R
      Dec 29, 2017 at 9:19 am

      “Yada yada disrupt industry blah blah blah driverless cars” – Elon Musk?

      • Javert Chip
        Dec 29, 2017 at 1:52 pm

        yup; him, too, plus he has an additional twist:

        “Yada yada disrupt industry blah blah blah taxpayer subsidy blah blah blah driverless cars”

        • Raymond Rogers
          Dec 29, 2017 at 8:22 pm

          If you made that into a meme that would be classic.

          I wonder if Bernie Maddoff is jealous or perplexed as to why these schemes are legal.

  5. Justme
    Dec 29, 2017 at 4:51 am

    Softbank was a giant disaster in the 1996-2001dotcom bubble, and contributed greatly to the general crazyness and huge investment losses of the era. But if you read the Softbank wikipedia page you would never know, the article AFAICT free of any reference to the spectacular failure of most Softbank investments at the time. If you search for “softbank dotcom crash” you will find it, though. I think it is important that people know about the history of Softbank.

    Apparently Softbank recovered again mainly again because of a year 2000 investment of $20M in AliBaba, which became worth $60B sometime after the IPO in 2014.

    Softbank is the poster child of bubble investing and of boom-bust economics.

    • MC01
      Dec 29, 2017 at 7:08 am

      Another article victim of Wikipedia’s Star Chamber? Nothing new under the Sun, I guess.

      Softbank bounced back because Son made a huge gamble on ADSL in 2001, offering 12 Mbps connections to both households and businesses for exactly half as much as NTT charged for the same service.
      To Son’s credit he was not merely ready to gamble even more of his personal fortune (he was still a multibillionaire in US dollar terms in 2001 but had lost a truly amazing fortune when his equities were wiped out by the crash) but managed to convince investors heavily burned by the burst to put down the funds needed to fund the venture.
      He also gambled on the iPhone at a time when the Japanese mobile phone market was owned lock, stock and barrel by domestic manufacturers such as NEC, Kyocera and Casio and won big time, being rewarded with an exclusive for several years.

      SoftBank is basically the hi-tech version of the banzai rider.
      For those not in the know, banzai riders where Japanese motorcycle racers who appeared mostly as wild cards in world championship races throughout the 80’s and 90’s, chiefly in the 125 and 250 classes. They were notorious for taking enormous risks and riding with complete disregard for their own safety, not to mention the fact many of them had access to factory-spec bikes and tyres.
      Apart from the most chauvinist racing fans (mercifully in those days they were few and far between, unlike now), it was hard not to like banzai riders.
      So just sit back and enjoy the race.

      • intosh
        Dec 29, 2017 at 7:31 am

        Thanks for the interesting info on Softbank. All its crazy moves this last year or two caught my attention so I was wondering what it was all about.

      • Michael Fiorillo
        Dec 29, 2017 at 10:38 am

        I know nothing about Softbank or its history, but it seems that Japanese companies have a habit of being played for rubes by their slicker US counterparts.

        If you recall, during the 80’s real estate boom, the Japanese reliably came to the casino, drunk and waving money, just as everyone else was cashing out. They bought tons of trophy real estate, including Rockefeller Center, which they promptly lost billions on and had to sell a few short years later at huge losses.

        I’m assuming more of the same in this case.

        • MC01
          Dec 29, 2017 at 11:11 am

          You are referring to Sumitomo Bank’s 1986 “purchase” of Goldman-Sachs, right? That is something still affecting the Japanese corporate world to this day. A lot of heads rolled when it was discovered all Sumitomo had bought was a large equity position, not the “advanced financial technology” they had boasted.
          Sumitomo had a reputation for being aggressive and “hardcore” which they always kept up even if this cost them enormous sums of money: apart from Goldman-Sachs they lost huge sums over Mazda and Ataka and during the liquidation which followed the zaitech bubble they lost even more.
          While the most quoted figure is over 100 billion yen in bad loans written off in a single year (1993), the total is surely far far higher.
          In 1994 things went from bad to worse when one of their executives was murdered in Nagoya in obscure circumstances: apparently he was about to go to the authorities and turn the Queen’s evidence about how enormous losses had been swept off the books. It was the kind of scandal Sumitomo hardly needed.

          SoftBank is different from Sumitomo. Everybody knows their business model is built upon huge leverages and taking massive risks, starting from the banks lending them money. Intriguingly enough one of their main banks is Mizuho, which was formed in 2002 by a three way merger between the Industrial Bank of Japan, Fuji Bank and Dai-Ichi Kangyo Bank (DKB). DKB brought as their dowry the government sanction to run the hugely popular takarakuji (national lottery)… fate, it seems, is not without a sense of irony.

        • Michael Fiorillo
          Dec 29, 2017 at 11:35 am

          Yes, the Gods may be cruel, but they do have a sense of irony and humor…

      • Justme
        Dec 29, 2017 at 11:55 am

        Good stuff, thanks for writing up the important historical information.

  6. martin bendelow
    Dec 29, 2017 at 6:02 am

    It behoves us to revise the use of the word bubble at ‘this late stage’ of the fiat money,central bank gosplanned regime. These are not bubbles….when they go off,it will be with the force of a very large bomb.

  7. prepalaw
    Dec 29, 2017 at 9:01 am

    There are old pilots.
    There are bold pilots.
    There are very few old bold pilots.

    Same can be said of reckless bike riders and investors.

  8. Meher Baba Fan
    Dec 29, 2017 at 11:22 am

    Thanks for article and subsequent feedback.
    Over on Naked Capitalism a couple of interesting observations about Uber which may or may not include Softbank. One is that Uber, with all the money being thrown at it, is a VC experiment to see just how far the boundaries of law can be pushed and regulations ignored. Its all deliberate basically!
    Many believe Tim Ferriss claimed to be a very savvy investor, needs to be called out and publically held accountable for his ruthless and aggressive promotion of Uber all these years purely for self benefit as an early-investor.Bad karma for having sucked in so many whom will suffer for following his advice’. Smart guy, some great books – but worth trusting on anything that has money involved in any conceivable way?

  9. Dec 29, 2017 at 11:47 am

    It’s like buying a bond at a discount to par and then collateralizing the full amount to buy stocks. Obviously the Feds emergency measure to mark to myth impaired assets, has become policy. From policy it becomes GAAP, and the ratings agency oblige. Why is the emergency is never over.

  10. mean chicken
    Dec 29, 2017 at 1:33 pm

    This must be OPM but is it circling the bowl? It seems the strategy is slightly different from the SNB buying large cap growth companies.

  11. Chester Hazlewood
    Dec 30, 2017 at 1:57 pm

    Price/value is derived in the context of producers producing and re-producing their goods or services (accurate price theory there low and behold). A supplier maybe able to enter to market with a good or service for a stretch of time, however if the supplier isn’t able to cover the cost entailed or derive enough profit to make it worth while the product or service will disappear from the marketplace.

    In Uber/Lyft’s case there is considerable lag because the drivers don’t crunch the numbers.

  12. chris Hauser
    Jan 1, 2018 at 10:28 pm

    it’s called a bet.

    on the future.

Comments are closed.