Uber's SoftBank deal may smooth road ahead for scarred startup

[SAN FRANCISCO] Technology billionaire Masayoshi Son just hitched a ride with Uber. But it's the ride-hailing company that's starting what it hopes is a new, less-bumpy journey.

Uber Technologies shareholders agreed to sell a sizable stake in the startup to a group led by SoftBank Group, adding to the already huge investments Son's company has made in the global ride-hailing business.

The deal announced on Thursday will bring new cash to Uber, prevent arch US rival Lyft from dealing with SoftBank, appease some early, antsy backers and pacify a previously warring management team and board, while solidifying the leadership of chief executive officer Dara Khosrowshahi.

All of that comes at a price: SoftBank and investors including Dragoneer Investment Group, Tencent Holdings and Sequoia Capital, are buying existing Uber stock at a valuation of about US$48 billion - well below the last financing round at US$69 billion. SoftBank is also purchasing US$1.25 billion in new preferred stock at the higher valuation. The transaction is expected to close in January, SoftBank said.

"As an investor we are pretty supportive of the deal," said Jay Kahn, a partner at Light Street Capital Management, which owns Uber shares and didn't tender any of its stake. "It really makes SoftBank financially and strategically motivated to support Uber in every capacity. If the transaction didn't go through, they could have allocated a significant amount of capital to Lyft."

A series of missteps and management turmoil distracted Uber this year while helping Lyft gain market share in the US, boost sales and get closer to profitability. In November, Son said SoftBank might walk away if he didn't get a good deal and shift the investment to Lyft.

With SoftBank soon to own billions of dollars of Uber shares, Son is unlikely to invest in the company's main rival. Son has backed competing ride-hailing companies in other parts of the world, but the race is so intense in the US that a similar strategy would likely backfire, Kahn said. "The key here is to create incentives not to embolden a competitor," he added.

The transaction also gives early Uber investors a chance to cash out. Venture capital firms typically don't like to hold investments for more than a decade because that's when they have to return money to their own backers. Uber has been around since early 2009, and isn't expected to go public until at least 2019, so the time is right. Benchmark, one of Uber's largest early backers, also clashed with former CEO Travis Kalanick over how the company was run, and was a prime proponent of the governance reforms attached to the deal.

Meanwhile, SoftBank will get two seats on the board and supports the new CEO, making it clearer who's in charge. Rajeev Misra, head of SoftBank's US$93 billion tech investment fund and a likely new board member, expressed "tremendous confidence in Uber's leadership" in a statement on Thursday.

"A realignment of goals and objectives with new shareholders who become the dominant voice will allow a clearer path to an ultimate IPO and greater harmony on decision making at the board level," said Ken Sawyer, who invests in late-stage startups at Saints Capital. "This was as much about governance and a re-sorting of ownership and control - in some ways even more so than an IPO would have been."

For Son, the deal makes him the leading investor in ride-hailing businesses across the globe, with stakes in the market leaders in China, India, Southeast Asia, Brazil and the US. That position may help Uber be an acquirer, rather than a target, in the consolidation that's expected.

"By holding a key stake in the largest player he can consolidate more efficiently," Kahn said.

BLOOMBERG