Define your generation here. Generation What اقرأها بالعربية Imminent Uber-Careem merger to come at the expense of consumers By
Alaa Haggag November 3, 2018

Although intense competition has long ensued between Uber and Careem, rivals at the fore of Egypt and the Middle East’s ride-hailing market, multiple signs that Uber is nearing a deal to acquire Careem may signal an end to this era.

On October 24, the Egyptian Competition Authority (ECA) announced its intention to act against the companies if a deal to merge is struck, considering this kind of agreement to be “detrimental to investment.”

Despite the authority’s warnings to Uber and Careem, such a deal “is only a matter of time,” according to one of a number of economists and professionals working for ride-hailing apps, who spoke to Mada Masr on condition of anonymity. Sources say the merger would be a lifeline for both companies, and while neither has yet officially confirmed or denied the rumored negotiations, several sources tell Mada Masr that talks are already underway.

In July, Bloomberg cited official sources as reporting that Uber Technologies was in preliminary talks with rival Careem to merge their passenger transport services in the Middle East. Maha Aboul Enein, Careem’s official Middle East spokesperson, would later dismiss the story as a mere rumor.

One official from Careem Dubai says that the company told employees that it was in talks with investors for a new round of investments to fund its expansion across the Middle East. Careem did not immediately comment after news broke that Uber intended to acquire the company, but later denied the claims.

Another Careem official says that the company’s management initially denied rumors about the negotiations. Yet several months later, after another leak, its executive management sent an internal memo to employees saying that they were in talks with Uber regarding the potential of its becoming an investor in Careem. They were asked to keep this information confidential, according to the source.

Khaled Ismail, a trading partner in Algebra Investments, a venture capital firm focused on investing in startups, says that Careem and Uber “need each other,” that a merger would not be surprising and that the completion of a deal is just a matter of time.

“Both companies have been expending all their energy to compete, which ultimately serves the interest of the consumer,” Ismail explains. “They have put huge investments into attracting clients, increasing the size of the workforce and continuing to spread throughout the large and still nascent market in the Middle East.”

The companies only have two options, he says. “The first is to agree to fix prices to end the brutal pricing war, for which they could face monopoly charges. Or they could merge, which would result in the same accusation.”

The same opinion is shared by a former official in Careem’s business development department, who says that the potential antitrust charges are likely the reason that the companies have yet to disclose the existence of negotiations, adding that confidentiality agreements may have been signed before the talks began. The official added that this is common procedure in cases involving major mergers and acquisitions, in order to preserve the pace of work at the company and avoid an impact on employees.

The former official, who spoke to Mada Masr on condition of anonymity, says that Uber is most likely the source of the leak about the talks, as it could increase the chances of the deal. It puts pressure on Careem by thwarting their attempts to secure investments from other companies, he explains.

After the leak about the potential merger in September, the ECA warned both companies that they must first obtain prior approval before completing a merger or acquisition agreement.

A press release issued by the ECA called on Uber and Careem to disclose information about the potential merger. Both companies denied the completion of any deal or contract, but did not refute the existence of negotiations around a future one.

In a press conference held on Monday, ECA head Amir Nabil said that as neither company had rejected the claims, they must notify the competition authority several days prior to the completion of any deal, according to Article 6 of the competition law (Law 3/2005). This includes any deals struck outside of Egypt, in accordance with Article 5 of the same law. If the companies fail to comply, the ECA has the right to take legal action against them, which could see fines of up to LE500 million levied against each company.

In regards to potential motives for a deal like this, Ismail explains that Careem is in the same corner as most companies, in which the only way to attract the requisite investment for expansion is to turn to a competitor. E-commerce platform Souq.com found itself in the similar circumstances, he says, with no choice but to attract investment and retain its presence except through a merger with Amazon.

Souq had been looking to secure further investments to finance its expansion in the Middle East since 2006. There were rumors of a US$1 billion offer by Amazon to acquire the company, although the deal was not completed until March 2017. The exact value of the deal was not disclosed, although NASDAQ market data shows that the value of the acquisition was estimated at some $580 million.

According to Ismail, Careem is in an unenviable situation, as it needs to attract investments in the near future in order to keep its head above water. Even this would be a temporary solution, he says, since the demands of competition, expansion and profit requires further investment on a massive scale, adding that a merger with Uber is almost the only remaining option.

In a statement on October 15, Careem announced that it was able to acquire funding worth US$200 million from a group co-led by Saudi Technology Ventures in partnership with the Al Tayyar Travel Group, the Kingdom Holding Company and Japanese firm Rakuten.

The statement added that it was the first deal to be closed in its latest US$500 million funding round, which will be channeled into expansion and investment in new technologies across the region.

Uber’s motives, according to Ismail, are to compensate for recent blows to its operations in the Middle East, Asia and Europe, in which charges leveled against the company have pushed it out of certain markets. In several cases, Uber was forced to exit due to legal disputes, or was driven off by fierce competition. Competition with Careem across the Middle East has also caused a decline in its strength.

If completed, the acquisition of Careem would increase Uber’s market value, increasing the chances of high share prices for its planned initial public offering next year. According to the Wall Street Journal, Uber received proposals from banks estimating the company’s value for an IPO at US$120 billion.

“The merger will make competition difficult for any new companies trying to enter the market,” ECA head Nabil said in a statement following the ECA’s Monday press conference. He explained that one of the reasons the authority has asked Uber and Careem to disclose the details of the merger is that there are signs that it would damage competition in the market, which would directly affect millions of people. He added that in 2016, Careem and Osta, another ride-hailing app, submitted a complaint to the ECA against Uber.

Nabil noted that Osta’s inability to compete with Careem and Uber pushed it out of the market, harming the overall environment for competition. Osta was only able to serve areas where Careem and Uber had not yet reached. But Uber and Careem were granted better incentives based on funding capabilities, which prevented Osta from capitalizing on the areas within the market it had opened for itself.

“We are the only competition protection authority in the world that is unable to impose fines and behavioral or structural measures, because we’re always waiting on the economic courts to hear the case before we can hold a party accountable for not implementing ECA decisions,” Nabil said during the press conference. According to Ismail, the authority must intervene to stop the merger rather than wait to penalize the companies after a deal is announced, because in his view, this would be incompatible with the ECA’s mission to prevent monopolistic practices.

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