Harry here. It seems like there’s a never-ending supply of cash for Uber, but this week its main rival in China, Didi Chuxing, also got into the mix. If you look carefully at Uber’s latest cash infusions, it seems like they’re being forced to go to further and further lengths to raise money. They’ve tapped Russian oligarchs and Saudi princes and now they’re moving into the world of leveraged debt. They may not be in a position to IPO anytime soon, but I just don’t know how many more options they have left when it comes to raising/borrowing money.
Today, RSG contributor John Ince dives in to the $2 billion Uber borrowed, the $7 billion Didi Chuxing raised and shares news on Uber’s potential IPO.
Uber Reportedly Seeks to Raise Up to $2 billion in the Leveraged Loan Market
Sum and Substance: Uber has hired Morgan Stanley and Barclays to sell a leveraged loan of $1 billion to $2 billion to institutional investors, the Wall Street Journal reported Tuesday.The move comes two weeks after Uber sold a $3.5-billion equity stake to a Saudi Arabian sovereign wealth fund. Uber declined to comment.
Leveraged loans are similar to junk bonds in that they are deemed high risk, but return higher yields. That’s something the company is apparently willing to stomach in exchange for preserving more ownership and value in its shares. “The deal with the Saudis was for equity, so you’re selling a piece of the company and splitting the upside,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. “If you sell debt, all you have to do is pay off that debt.”
Despite a valuation of $62.5 billion, Uber remains thirsty for cash as it expands internationally. That’s an increasingly expensive proposition, particularly in cutthroat markets such as China, where chief rival Didi Chuxing recently raised $1 billion in funding from Apple. Contributing to the company’s growing costs is its effort to recruit enough drivers to fend off competition.
To help get more drivers behind a wheel, the company introduced an auto financing program this year – but such initiatives aren’t cheap. “Uber has become capital intensive,” Gordon said. “That’s why they’re raising so much money. Think about how many cars you’ll need to be the ride hailing leader in China.”
According to the Journal, the deal would bring the amount raised in debt and equity by Uber to about $15 billion. The San Francisco company is reportedly hoping to pay borrowers interest rates of about 4% to 4.5%. That may be too low considering Uber has no major fixed capital assets and appears to be burning through money to grow, said Gregory Sichenzia, a partner at securities law firm Sichenzia Ross Friedman Ference. “It’s a high risk instrument so you’re going to pay 5% to 6% in this kind of environment,” Sichenzia said. “But they need cash if they’re going to expand to every market in the world.”
My Take: Barely a month after they raised the largest amount of money ever for a startup – $3.5 billion from the Saudis – Uber is now looking to raise up to $2 billion in risky debt. What’s really going on here? Debt financing, especially leveraged debt with high interest is very unusual for a startup.
Also, Uber doesn’t share any of its financials with prospective investors or lenders, so they’re asking lenders to make a blind bet. Sounds like Uber desperately needs some cost control mechanisms. The fact that they’re turning to debt cannot be a comforting sign for existing investors, especially with their chief rival in China scoring big in the financial sphere. As Erik Gordon said, “All you have to do is pay off that debt.” Yes, but tough to do when you’re bleeding red ink of upwards to a billion a year.
Didi Chuxing, China’s Rival to Uber, Scores $7 Billion in New Funding
Sum and Substance: China’s homegrown competitor to Uber Technologies Inc. has raised $7.3 billion in its latest fundraising effort, giving it a host of powerful allies including Apple Inc. to fend off the global ride-hailing champion locally. Didi Chuxing Technology Co., the country’s biggest ride-sharing company, said Thursday that it closed a $4.5 billion fundraising round that attracted new investors such as Apple, China Life Insurance Co….
My Take: First, this is a subscription article, so you need to pay to read the whole article, but the headline tells you all you need to know. The ridesharing financial arms race between Uber and Didi is officially on. Both companies are digging in for a long, protracted war and the weapon of preference is cash.
The amounts raised are staggering. The $3.7 billion Uber raised from the Saudis is nearly twice as much as Facebook raised during the entire period they were private. What Didi raised in this round is almost twice that amount. Leaked figures indicate Uber lost over a billion in China in 2015, much of it spent on subsidies to passengers trying to get them on the platform. Despite the giveaway, Uber still trails Didi heavily in China market share. At what point does Uber start to cut their China losses and stop throwing good money after bad? The answer to that question may determine how long Uber remains a viable company financially, especially with an IPO looking distant for Uber.
Travis Kalanick Says Don’t Expect an Uber IPO For a Very Long Time
Sum and Substance: Uber investors may have to wait a while before they get any money out of the ride-hailing giant. “What I say is we have an obligation to ultimately find liquidity for the investors. But more importantly, we have thousands of employees that own stock [who gave] their blood, sweat, and tears to make Uber a great company,” Kalanick said, according to Business Insider. “I say we are going to IPO as late as humanly possible. It’ll be one day before my employees and significant others come to my office with pitchforks and torches. We will IPO the day before that. Do you get it?”
For one thing, he said, employees at public companies wasted an inordinate amount of time checking on their money. “If you can keep your employees from refreshing every 10 minutes to see what the stock price is, your company is going to be more geared towards the future and move faster,” Kalanick said. When pressed on an approximate pitchfork timeframe, Krannick hemmed and hawed, and referred to his previous reply. He finally relented, sort of, when Diekmann asked him for a rough estimate. “It’s going to be,” he said, “somewhere between one year and 10.”
My Take: There are lots of rumors flying around about Uber’s reasons for postponing their IPO. Several investors have publicly expressed their displeasure with Uber’s current stance saying that the company has an obligation to investors to provide liquidity to their stock.
One potential reason for the delay could be that Travis Kalanick and team simply don’t want the company’s financials to undergo the closer scrutiny that comes with an IPO. They would have to release detailed statements, which so far they have refused to do.
Last week I got an interesting perspective on all this from two different passengers. The first was a financial advisor who occasionally consults with Uber. He said that Uber is decidedly “employee unfriendly in compensation.” When I pressed him, he said that Uber’s salaries are cash low and equity high – meaning Uber is in part selling its employees on the promise that their equity will eventually appreciate in value. However, he pointed out that the shares of equity it gives to employees are handcuffed with all kinds of restrictions that prevent them from selling their shares. Thus the employees must wait for the IPO to cash out.
He added that Uber’s distribution of equity to employees is so “muddled” that most employees don’t understand all the restrictions that may devalue their shares of stock.
The second passenger works for a wealth advisory firm that advises venture capital firms. He has studied Uber’s financial policies and says that Uber uses all kinds of “liquidity preferences” in its fundraising rounds to entice new investors. The effect of liquidity preferences is to give precedence to certain classes of investors in the event of a liquidity event like and IPO … or a bankruptcy. What this means in practice is that equity shareholders without liquidity preferences (like employees) are usually at the bottom rung of the totem pole and could possibly be SOL if Uber’s stock price suffers when the company does eventually go public or get acquired.
Uber driver returns lost money to World Series Poker player
Sum and Substance: A World Series of Poker player says he hit an “emotional jackpot” thanks to an Uber driver who returned his $7,000 ante.
Jacob Brundage, of Lakeland, Florida, told the Las Vegas Review-Journal that he lost a tote filled with cash and playing chips June 1. The 39-year-old says he realized the bag was in an Uber car he rode from The Venetian to the Rio. Brundage failed to reach the driver through the app and enlisted a group of waiting Uber drivers to help. The driver, who wants to remain anonymous, called Brundage and returned the bag. Brundage gave him $200 as a reward.
My Take: I’m curious to know if the driver knew there was $7000 in the sack. Even if he did, I think he made the right choice both on moral and practical grounds. He could easily have been traced through the system had he tried to abscond with the cash. This way he not only gets a $200 reward but also tons of good publicity. In the article below we see that some people are willing to invest a lot more than $7,000 in the hopes of getting good PR.
Under Pressure, Lawyer For Uber Drivers Slashes Her Fees
Sum and Substance: The lawyer representing Uber drivers in the historic settlement — which could total as much as $100 million — is under attack.
Critics and even the judge in the case say attorney Shannon Liss-Riordan may not be fighting hard enough, and that she may be accepting too little for the drivers. Liss-Riordan disagrees, and to prove her pure intentions, she is reducing her fees.
The last couple of weeks have not been pretty. “The attorney, Shannon, doesn’t work for our side at all and we reject she represents us at all,” driver Adam Shaheen says about Liss-Riordan. The hearing went on for more than three hours. Driver Mohamed Hajyousif sat through it. “I don’t want to accept the weak settlement that, you know, that lady — she accept for us.” In response to the point that many drivers have signed on to join the class action, which she has been litigating for three years, he says, “but look at the result. After 3 years, she comes up with a very weak settlement.”
Liss-Riordan sat down with NPR to explain herself. She’s just submitted a notice to the court that she’d like to reduce her fee in the proposed settlement by $10 million. That’s about half, so long as Uber remains a private company.
Liss-Riordan wants to clear up some misconceptions. First, Uber’s crazy high valuations — worth $10 billion, then $50 billion, then $60+ billion — she says they don’t affect how much drivers get for past wrongs, in the eyes of the law. But if Uber keeps operating as is — doesn’t reclassify drivers as employees, even if they’re driving full time and overtime — drivers can sue. Drivers in New York recently filed a suit. And, she says, her settlement doesn’t set a bad precedent for them. The judge has not yet ruled on the proposed settlement.
Call Out To Drivers: NPR is interviewing Uber drivers about their work. If you’re a driver and would like to talk, email tech@npr.org. And please include a screenshot of your last weekly earnings statement from your Uber app.
My Take: Looks like Shannon Liss-Riordan is in damage control mode. By offering this concession, a $10 million pay cut, she hopes to restore her credibility – both before an angry driver mob and the judge. Yes, $10 million is a lot of money, but so is the $10 million plus she will still get in this case.
I’m not familiar with the legal parameters here, but we’ve got to remember, this is just an offer. It’s not a reality until the judge signs off on it. The fact that Liss-Riordan has gone to NPR with this news is an indication that she wants something back – most likely her respect. Whether she will get it remains to be seen. My guess is that the damage has been done and her name will remain muddied, even if the offer to take a pay cut is accepted.
Your Uber Driver Is Probably Working on a Hot New Startup
Sum and Substance: For six years, Harry Campbell had a good gig as an aerospace engineer for Boeing. His job at the Fortune 500 company offered structure, stability, and predictability. But Campbell, 29, was looking for flexible work hours and creative ways to diversify his income.
So in 2014 he turned to Uber and began driving for the ridesharing service part-time. He quickly found that being an Uber driver involved more than just taking passengers from point A to point B. “Some drivers treat it as a really casual part-time gig, but what you’re really doing is running your own business,” he says. “You have to think about how much money you’re making in addition to expenses, insurance, liability and taxes.”
Campbell is part of a growing demographic of business owners who choose to partake in the sharing economy. Intuit recently conducted a study surveying more than 4,600 on-demand economy workers and found that 39% own their own businesses and 32% want to be their own boss. The study cites work flexibility, control and autonomy as workers’ primary incentives, but there are some surprising benefits that explain why more and more entrepreneurs are drawn to the perks of the on-demand economy.
My Take: Yes, the entrepreneurial spirit is alive and well, even inside the Uber cars. This article features our very own Harry Campbell, who describes the plusses and minuses of being your own boss. Yes, it’s a mixed bag … oh and by the way, have I told you about my new startup?
Readers, what do you think of this week’s news?
-John @ RSG
