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Zomato and UberEats are cooking a new merger deal

If the deal materializes, the Zomato-UberEats entity will emerge as India’s largest food-tech company, leaving Swiggy behind.

Picture by Avanish Tiwary

After Southeast Asia and South Korea, Uber’s food delivery arm UberEats might be calling quits in India as well, considered to be one of its biggest potential markets.

The Silicon Valley-headquartered company is in the final stages of discussion to sell UberEats to the local rival Zomato in a bid to cut losses, Techcrunch reported citing sources.

The deal, which values UberEats at USD 400 million, is likely to involve Uber investing USD 150-200 million in the new combined entity, as well as holding a significant stake in Zomato. This development comes at a time as the homegrown food tech unicorn eyes USD 600 million in the next round of funding in January 2020.

“Zomato will go ahead with the acquisition only if Uber invests in the joint entity. They want Uber to have skin in the game else it won’t make sense for the Indian company,” local media Economic Times reported quoting two sources. Uber’s capital commitment can range between USD 100-200 million, but this may be along with a few other investment fund.”

If the deal materializes, the combined Zomato-UberEats entity will undeniably emerge as India’s largest food ordering and delivery company, leaving rival Swiggy behind which currently holds larger market share.

Since the beginning of 2019, the ride-hailing company, which brought UberEats to India in mid-2017, has been in talks for a possible buyout with Swiggy, Zomato, as well as e-commerce behemoth Amazon India, which recently entered the food delivery space.

However, in October, Uber denied giving up on India’s soon-to-be USD 4 billion food-delivery-market after its multiple attempts to sell off UberEats failed. The conviction to be in the India market is in direct contrast with how its performance has been in the country. For the September quarter, Uber said its India business dragged down UberEats global net revenue by 0.4%. As a result of this, the American firm had projected a negative revenue of USD 107.5 million for its UberEats India business between August and December in 2019.

Uber India’s chief product officer Manik Gupta, in an interview, said the company would not be folding UberEats operations in the country, adding that UberEats has been “growing substantially”.

A month later in November, Bansi Kotecha, Uber Eats head of operations in India and South Asia reiterated the confidence that Gupta had shown in UberEats India.

Barely after 10 days of showing such confidence, the local media Times of India reported it is talking to Zomato for a potential merger. At about the same time, rumors of a merger between Zomato and Swiggy also surfaced which both the companies denied completely.

With a new deal cooking between Zomato and UberEats, the Gurgaon-based food delivery giant will be able to expand its business across the country leveraging the latter’s reach.

According to industry estimates, UberEats is present across 44 cities and receives 400,000 to 600,000 orders per day, only a third of what Zomato and Swiggy do. While Zomato claims to cater to 1.25 to 1.3 million orders per day, Swiggy handles 1.4 to 1.5 million orders a day.

All the three players—Swiggy, Zomato, and UberEats, have been splurging money in discounts and promotional offers to woo customers. As per the sources cited by ET, UberEats loses anywhere between USD 0.7 to 1.1 (INR 50-80) per order; for Swiggy and Zomato, this figure stands at about USD 0.1 to 0.4 (INR10-30).

Little surprise then, the food tech companies are reeling under heavy losses. Swiggy saw its losses spike six times to USD 333.1 million in the financial year ended March 2019, over a year-ago period, while operating revenues went up 2.5x to USD 159 million in the same time period. Meanwhile, Zomato’s losses went up by 9.4x to USD 139.4 million in the last fiscal, as operating revenues rose 188% to USD 194.8 million. Although UberEats’ numbers aren’t available for FY19, the ride-hailing giant is projecting operating losses of  USD 309.7 (INR 2197 crore) for the five-month period between August to December 2019, according to a valuation report filed by the company with the Indian government.

The move to sell UberEats in India is in line with Uber’s global business strategy of exiting loss-making markets by selling its local business and acquiring stakes in competitors. In the past, Uber has made exits from several markets after enduring heavy losses.

In 2016, it sold its China ride-hailing business to local rival Didi Chuxing, taking an 18.8% stake in the latter. In March 2018, Uber exited Southeast Asia, by selling its ride-hailing as well as food delivery operations to Asian giant Grab, in which it now holds a 23% stake.

It was only in South Korea that UberEats had to pull the plug on its food delivery service in October 2019 due to cut-throat competition.

According to Techcrunch, Uber chief executive Dara Khosrowshahi at a New York Times conference last month said the company is “very clear that, with UberEats, we are either going to be No. 1 or No. 2 player in every country where we operate in the next 18 months—or we are going to get out.”

In India, where UberEats has maintained its number 3 position, it seems it’s time to hand over the baton.