Ola's chess match with both rivals and investors; seeks $1 bn funding

Market speculation on next moves, with it and arch-rival Uber having the same big stakeholder, raises questions on future consolidation

Cab service company Ola is looking at raising a new round of funding, of at least $1 billion (Rs 64 billion), from Singapore-based Temasek Holdings to diversify its investor base. And, its US-based rival, Uber Technologies, is deciding to sell its business in Southeast Asia to local rival Grab Inc. With these, the focus has again shifted to the outlook for the ride hailing business in this country, in case the US-based company also sells the business and merges it with Ola, in exchange for equity. 

Both have a common investor, Japan-based SoftBank. The latter recently took a 20 per cent stake in Uber and, according to estimates, also has more than 20 per cent in Ola, the largest stakeholder there. 

Ola promoters Bhavish Aggarwal and Ankit Bhati  have already put in place a plan to deal with the eventuality of a merger or buyout, to ensure they are in management control. For one, they are clearly diversifying their investor base. This is to ensure no one investor, such as SoftBank, is able to dictate terms. 

Ola declined to comment. Those in the know say the strategy is based on the tense boardroom battle at e-marketplace Snapdeal, were SoftBank put pressure on the promoters to sell the business to Flipkart, which they resisted. The Japanese investor then wrote off its investment in Snapdeal. That explains Ola’s latest round of funding of $1 billion, for which they are looking at a new partner in the Singapore-government supported Temasek Holdings. In October last year, it raised $1.1 billion, led by SoftBank’s rival Chinese investor, Tencent. Some estimate the Chinese investor has around nine per cent stake. And, experts say, SoftBank’s stake has fallen due to the new funds raised, which it could make up by buying from existing investors which want a partial exit.

Second, the company has changed its Articles of Association. Under which, any transfer of equity shares by Ola investors which have 10 per cent or more of the total equity would need clearance of the promoters. So, SoftBank cannot raise its stake without promoter support. However, Softbank can buy stakes to maintain its overall shareholding, which might have come down due to expansion of the equity base. Sources say the holding is now 22.5-25 per cent. The promoters have around 12 per cent.

It is also believed that SoftBank, which has the right to appoint another director on the board (it has one), can do so only if it is endorsed by the promoters and other shareholders. The promoters have three seats on a board of eight. It is not clear whether the promoters have special voting rights, a common strategy abroad in start-ups which have become big.  

The other piece of the puzzle is the next move by Uber. Dara Khosrowshahi, its global chief executive, while on a short visit to India last month, had reiterated this country was one of Uber’s “core” markets. Where it would continue to invest and so also in Southeast Asia, despite losing money.  He had also made clear that the view of SoftBank was “one voice in the board” and that it was he who ran the company, with the support of the board. 

However, with the complete volte face in Southeast Asia, analysts say Dara seems to be following the advice of SoftBank in the board, which has publicly stated that it should concentrate on America, Europe and Australia to improve profitability. And, despite the announcement on the hiring of Indian cricket captain Virat Kohli as its brand ambassador, a few days after the Grab deal story broke, analysts say selling out or merging could be the next logical step. Though, the timing could be a matter of debate. 

Those in the business say, however, that the dynamics of the Indian market are different for those at Southeast Asia. And, that an immediate merger looks unlikely. In both China and Southeast Asia, Didi Chuxing and Grab control a little over 80 per cent of the market. In India, there is no such dominance for Ola; the gap can be bridged. Second, they point out, the cash burn in India, with incentives being reduced, is much less than in Southeast Asian markets and the break-evens could be easier. 

A valuation report by Jain Ambavat & Associates last March, part of Ola’s disclosure to the registrar of companies, say it would make an operating profit after tax of Rs 11.7 billion in 2018-19. And, in the subsequent two years, that number would go to Rs 33.2 billion and Rs 64.2 billion, respectively.