A front page article in the Wall Street Journal this morning is titled “Softbank Seeks Big Chunk of Uber at Steep Discount.”  It is available online (subscription required) here.  The article states that the current “valuation” of Uber is $68 billion, and that Softbank’s CEO Masayoshi Son wants to invest as much as $10 billion in Uber.  But there’s a catch…

I have written about Uber before  when the implied equity capitalization of Uber was $51 billion (August 2015).  At that time, Uber’s implied equity valuation exceeded that of FedEx, which now stands at $57 billion.

Softbank Is Buying Minority Interests

The article says that Softbank wants to purchase between 17% and 22% of Uber as follows:

1. $1.0 billion to be invested in Uber at the current “valuation” of $68 billion.
2. Up to another $9 billion from existing shareholders at a discounted price assuming an equity value of $50 billion, which reflects a discount of 26.5% from the current “valuation” of Uber.

The specific mechanics of the proposed deal are not disclosed in the WSJ article, but we can guesstimate how things might work.

• If $1.0 billion is invested in Uber at the $68 billion valuation, it would account for about 1.5% of the equity ($1.0/$68.0).
• If another $9.0 billion is invested by acquiring shares from existing owners at an equity value of $50 million, another 18% of Uber would be acquired.
• On a blended basis, 19.3% of Uber would be acquired at an average valuation of $51.8 billion.

In normal valuation terms, assuming that the $68 billion valuation is an “as-if-freely-tradable” value, the tender offer at a $50 billion valuation to existing shareholders would represent what is called a marketability discount of 26.5%.

Will a Softbank Transaction Devalue Uber?

But some of the owners fear that the transaction would tend to change the $68 billion “valuation” to a $50 or $52 billion valuation as noted above:

Existing Uber shareholders have expressed concern that the process could devalue the company as it heads toward an initial public offering in as few as 18 months.

Given Uber’s history of large and rising losses (on the order of $3 billion in 2016), its recent reputational stains (which hopefully will come under control with a new CEO), and the existence of numerous competitors in it space worldwide, perhaps Softbank is thinking that a $52 billion implied valuation is more reasonable today than a $68 billion valuation?

For existing investors and employees who own stock, the opportunity to exit at a $50 billion equity valuation could be an exciting prospect.  And maybe all of this is a recognition that the implied equity valuation of Uber in its most recent $1.0 billion raise deal of $68 billion had raced too far too fast?

We will see what Uber’s board does with the SoftBank offer…

While we wait, be well!

Chris

Reminder

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