Didi, Uber said to merge in China in $35 billion deal

By Heather Somerville and Denny Thomas

(Reuters) - Ride-hailing firm Uber is to merge its China operations with bigger rival Didi Chuxing, and hold a one-fifth stake in the new business, in a $35 billion deal to end bruising competition between the two, according to a source familiar with the matter.

A deal between the two - which have been spending heavily to gain market share and battling fiercely for passengers - could be announced as early as Monday, said the source, who declined to be identified because the deal is not yet public.

The new entity combines Didi's most recent valuation of $28 billion and Uber China's $7 billion valuation for the $35 billion market capitalisation. Uber China investors will have a 20 percent stake in the new company, the source said.

Uber did not offer any immediate comment. Didi could not be reached for comment.

"It makes huge sense, Uber faces an uphill task in China especially since Didi is multiple times larger by transaction value and city coverage," said Hong Kong-based Richard Ji, co-founder of All-Stars Investment Ltd, which manages about $900 million and owns Didi stock.

"This will lead to favourable outcomes for both companies. The biggest benefit is cost savings, they no longer have to give out subsidies to drivers and passengers. It will give pricing power as the new entity will become the dominant player. That means profitability will come sooner than later," he added.

Under the deal, Didi will also invest $1 billion in San Francisco-based Uber, which operates globally outside China, the source said, adding to a series of deals and joint ventures Didi has struck in recent years.

Didi last year invested $100 million in Lyft, Uber's main rival in the U.S. It has also formed an alliance with Lyft, India's ride service Ola and Southeast Asia's ride-hailing startup Grab in an effort to compete with Uber's global dominance.

Analysts say Didi's latest move is a signal of its readiness to step beyond its home market.

"This clearly shows Didi's global ambitions and its desire to work together with Uber to tap Chinese travelers, who are going out in big numbers. There's a possibility the two could work together in other markets," All-Stars Investment's Ji said.

CHALLENGING CHINA

China has been a challenging market for Uber, which has been burning through more than $1 billion a year in a price war with Didi. Uber is profitable in the United States, Canada and about 100 other cities.

The deal is the latest sign of a global Internet or technology company struggling to break into China's cut-throat market, where local entrepreneurs have built formidable businesses, partly helped by a supportive government.

It also comes just two months after Apple Inc made a rare $1 billion investment in Didi.

China last week issued guidelines that establish a long-awaited framework for the booming ride-hailing industry and remove uncertainty for firms such as Didi and Uber.

Didi itself was created last year from the merger of two companies backed separately by e-commerce giant Alibaba Group Holding Ltd and social network firm Tencent Holdings Ltd.

(Reporting by Heather Somerville in SAN FRANCISCO, Denny Thomas in HONG KONG, Rama Venkat Raman in BENGALURU; Editing by Edwina Gibbs and Ian Geoghegan)