Uber's ride-hailing service in Russia will merge with a much larger competitor, Yandex, the companies announced Thursday, in a deal valued at $3.7 billion.
The Russian search giant, which also has a taxi business, will claim majority ownership, and Tigran Khudaverdyan, the chief executive of Yandex's taxi operations, will lead the new company.
While the deal must first pass regulatory approval, the boards of both companies have already given the green light. Uber will own just under 40 percent of the new business.
Experts say the joint venture is the latest sign of the challenges that Uber has faced expanding overseas, where it has engaged in costly price wars against entrenched local competitors. The Yandex deal ends one uphill battle for Uber in competing against a dominant player overseas, and solidifies a strong position for the company in Russia and Eastern Europe.
“In many ways it's reminiscent of Uber’s battle in China,” said Arun Sundararajan, a professor at New York University’s Stern School of Business. “It’s a natural conclusion in an effort to gain market share where there is a large domestic competitor. It allows Uber to strike a deal. Neither company has to fight the price war anymore.”
Last year, the San Francisco-based company sold its business in China to Didi Chuxing, an archrival in the country and the largest ride-hailing service there. The sale highlighted the immense challenge, faced by many other Silicon Valley giants, of going head-to-head with dominant Chinese players.
In the cutthroat battle to lure China's consumers, which number more than 1.3 billion people, both Uber and Didi were losing money, outdoing one another to offer lower prices but forgoing profitability in the process. The deal allowed Uber to keep its competitive foothold in China with its roughly 20 percent stake in Didi, which Uber said has risen in value by $2 billion.
Sundararajan added it's also possible that Uber's long-term plan was never to unseat the major firm in Russia but to eventually squeeze itself into a partnership. “In retrospect it may be that this was the strategy all along,” he said. That kind of deal making could allow the company to direct its resources toward costly and ambitious goals, such as building an autonomous fleet of on demand cars, rather than subsidizing price cuts against a stronger competitor, he said.
When asked about that theory, Uber declined to comment.
In Russia, Yandex offers more than twice as many rides as Uber, at about 24 million per month, according to business data shared with investors. Yandex also counts nearly double the gross revenue, at over $1 billion. And while each company will keep its brand, Yandex customers will be to able to use their app to summon Uber rides in countries where Yandex doesn't operate, and vice versa. Uber's food delivery service, UberEATs, will also expand operations in the region.
“Combining Yandex’s local expertise in search, maps and navigation with our leading global experience in ride sharing will enable us to build the best local services and provide a credible alternative to car ownership across the region,” Pierre-Dimitri Gore-Coty, head of Uber’s business in Europe, the Middle East, and Africa, said in a statement.
Uber's deal in Russia comes after a tumultuous period for the company. In recent months, Uber has been rocked by regulatory scandals, legal battles, accusations of harboring a toxic workplace culture, and a flurry of departures from top leadership, including the resignation of Travis Kalanick, the brash former chief executive. The company has since adopted sweeping reforms to reshape its internal policies and repair its public image, but it remains unclear whether the ride-hailing service — once viewed as the darling of Silicon Valley — can fully recover from its steep fall.
For Uber, the Yandex deal is part of its plan to get into the black, tempering its expand-at-all-costs strategy with something more financially pragmatic. In the first quarter of this year, Uber reported more than $700 million in losses. But that figure is down from the last three months of 2016, when Uber said it lost nearly $1 billion.
“This deal is a testament to our exceptional growth in the region and helps Uber continue to build a sustainable global business,” said Gore-Coty. Uber expects its losses to shrink further in the second quarter.
The newly combined business, which the companies estimate could service more than 400 million rides this year, will operate in 127 cities across six countries, including Russia, Armenia, and Azerbaijan. Uber, which currently operates in more than 76 countries worldwide, will own roughly 37 percent of the new company and will invest $225 million. Yandex will put in $100 million and take about a 59 percent stake. The remaining 4 percent belongs to employees.
The companies expect the deal to close later this year.