Interesting numbers behind the Uber-Swiggy proposed deal

By Morningstar |  25-02-19 | 
 

Launched in 2014, Uber Eats has been hugely successful. By the first quarter of of 2017, it had more than 8 million active users in the U.S. alone. Mid-2017, Uber Eats entered India’s competitive food-delivery market with a fair amount of fanfare.

Before we proceed, take a look at the dominant players in India’s food delivery space:

If news reports are to be believed, Uber Eats is beating a hasty retreat. Less than two years down the road, the company is in talks to sell to Swiggy. It could be a shrewd tactical play; Techcrunch reports that Uber Eats is a major revenue generator that grossed $1.5 billion in sales in the first quarter of 2018.

SAJITH PAI sees a familiar playbook emerging – where Uber competes hard with a local player, and then sells its local business to the competitor for a juicy stake. He calls it ‘Threat Capital’ and explains below why he likes to refer to it as such. He is, however, quick to clarify that this is mostly speculation and theorizing based on the limited facts available.

Over the past few days, several media reports have stated that Uber is selling its food delivery business Uber Eats to Swiggy via a share swap, leading to Uber getting a 10% stake in Swiggy. Effectively, this translates into Uber buying a tenth of Swiggy for what it has invested in Uber Eats.

Swiggy’s last known valuation in December 2018 was $3.3 billion. It has risen at a fast clip on the back of several funding rounds, from $700 million in February, to $1.3 billion in June and by the end of year, $3.3 billion.

Now, let us look at what Uber has invested in Uber Eats. This is effectively the ‘burn rate’ or burn, as is described in the venture or startup world. Burn rate is nothing but a measure of negative cash flow. In the case of Uber Eats, the burn is the revenue from food orders less what it is spending to service the orders.

So what has Uber Eats burned to reach here?

Uber Eats launched in India in May 2017. In its first year, it grew steadily, to touch 15,000 orders daily. Sharp spikes were seen every quarter to eventually touch 300,000 orders daily by December 2018. We have data that it has ‘burnt’ $25 million in December 2018 to service 3 lakh orders. Let us use this ratio of burn of $25 million at 9 million monthly orders to project across the past months.

Here are the projections.

  • FY18: $24 million
  • April-May-June 2018: $9 million
  • July-August-September 2018: $24 million
  • October 2018: $8 million
  • November 2018: $17 million
  • December 2018: $25 million
  • January 2019: $25 million
  • February 2019: $23 million

This totals to $155 million. Since there is a possibility that I have underestimated the above burn rate, let’s round off the total burn to $200 million.

If this is accurate, then Uber Eats is effectively getting a 10% stake in Swiggy at a discount. At Swiggy’s recent $3.3 billion valuation, 10% is $330 million. But, Uber Eats has only invested or burnt $200 million.

In 2016, a similar saga was played out when Chinese ride-hailing service Didi Chuxing acquired Uber's China business via a share swap. Uber Technologies 'invested' or burnt $2 billion to get 17% of Didi. This stake of Didi’s was worth $6 billion.

As emerged in the podcast Acquired"Was it a good move for Uber to engage in all this activity and then leave with the 17% stake in Didi? If you just look at the raw dollar leverage, it’s a very short period of time of blowing $2 billion to get almost $6 billion in value of present dollars. And the hope is that you make that investment and Didi continues to grow in value in China."

In 2018, Uber did a similar move with Grab. The latter acquired all of Uber's Southeast Asia assets and operations in Cambodia, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, including UberEats, Uber obtained a 27.5% stake in the company, which was then valued at $6 billion, having invested $700 million in the region. Once again, a bargain ‘buy’ for Uber.

I have a term for this - Threat Capital.

Effectively, this meansI will bleed you and me to death, unless you buy me out and give me a substantial stake in the business!” Uber with Didi, Grab and, in all probability, Swiggy, has emerged as the ultimate practitioner of Threat Capital.

Does that mean it is wrong for Swiggy to go ahead with this deal? Not at all. Giving away a portion of their business at a discount may be less expensive than the high losses / burn they would have to keep incurring.

I guess it’s a win-win for everyone!

Sajith Pai is part of the investment team at Blume Ventures, which has a stake in Swiggy’s competitors Zomato (via Runnr) and Dunzo.

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