Uber to sell China business to rival Didi after losing billions

Didi Chuxing, the dominant ride-hailing service in China, said it will acquire Uber Technologies' operations in the country, ending a battle that cost the two companies billions as they competed for customers and drivers.

Didi will buy Uber's brand, business and data in the country, the Chinese company said in a statement. Uber Technologies and Uber China's other shareholders, including search giant Baidu, will receive a 20 per cent economic stake in the combined company. Didi founder Cheng Wei and Uber Chief Executive Officer Travis Kalanick will join each other's boards.

The truce brings to an end a bruising battle between the two companies for leadership in China's fast-growing ride-hailing market. Uber has been spending at least $1 billion a year to gain ground in China, while Didi offered its own subsidies to drivers and riders to build its business.

"Didi Chuxing and Uber have learned a great deal from each other over the past two years," said Cheng, who is also CEO, in the statement. "This agreement with Uber will set the mobile transportation industry on a healthier, more sustainable path of growth at a higher level."

Didi's valuation after the deal will be $35 billion, said people familiar with the matter, asking not to be named because the details aren't public. Last year, China's ride-hailing leaders Didi and Kuaidi joined forces, creating a homegrown juggernaut to fight off Uber. The merged company Didi Chuxing brought together backers Alibaba Group Holding and Tencent Holdings, the country's most valuable internet businesses. Apple joined in this year with a $1 billion investment in Didi, in a round that valued the company at about $28 billion.

The Chinese government passed a new rule last week that legalised ride-hailing services, paving the way for further expansion of these businesses.

Uber's investors had been clamouring for the company to sell off its China assets and focus on more promising opportunities. Uber has lost more than $2 billion in the country, people familiar with the matter said. Meanwhile, Uber was profitable in developed markets in the first half of 2015, the people said.

DECODING THE DEAL

• Didi Chuxing will buy Uber’s brand, business and data in China. The combined entity would be worth $35 bn
• Uber Technologies will receive 5.89% of the combined company with preferred equity interest equal to 17.7%
• Uber China’s other shareholders, including Baidu, will receive 2.3% of the economic interest in Didi Chuxing
• Didi will invest $1 bn in Uber
• Uber CEO Travis Kalanick and Didi founder Cheng Wei will join each other’s board
• Didi, created last year from a merger of two firms backed respectively by e-commerce giant Alibaba and social network firm Tencen, has invested $100 mn in Lyft
• Didi had picked up a stake in Bengaluru-based Ola last year as part of a $500-mn funding round

Source: Agencies and news reports

"As an entrepreneur, I've learned that being successful is about listening to your head as well as following your heart," Kalanick wrote in a blog post obtained by Bloomberg before publication. "I have no doubt that Uber China and Didi Chuxing will be stronger together."

The deal is subject to government approval. While the combination of the top two players in a market would often raise regulatory scrutiny, officials will have to determine the range of competition. "The ministry of commerce has to define the size of the market and see if the car-hailing business Didi and Uber are offering can be replaced by similar services," said Deng Zhisong, senior partner at Beijing-based law firm Dentons. "If you count taxi services and public transportation, the car-hailing sector will not have a market share that significant."

The purchase of Uber's China business may complicate Didi's alliance with other ride-hailing startups around the world. Didi had agreed to work with the US's Lyft, India's Ola and Southeast Asia's Grab to create a global force to take on Uber. Grab CEO Anthony Tan said in a statement on Monday that the impending deal is a victory for Didi and underscores how the ride-hailing business favours domestic players.

In China, Uber ventured where few US technology companies have succeeded. In 2005, Yahoo! made a similar deal, selling its businesses in China to Alibaba, along with a $1 billion investment - one of the Silicon Valley company's best bets.

"China is such a tough market, in terms of regulation, competition and culture; they faced challenges on so many fronts," said Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong. "Cooperating with rather than fighting Didi might not be such a bad idea."

While Uber will walk away from operations in China, it is taking a significant stake in the largest player there. By shedding its massive losses in China, the move could help Uber clear the path for an eventual initial public offering.

"Uber and Didi Chuxing are investing billions of dollars in China, and both companies have yet to turn a profit there," Kalanick wrote in the blog post. "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."