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Uber-Didi Tie-Up Threatens Lyft in U.S.

Lyft sees ally Didi team with its biggest rival, which is now no longer burdened by China

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Lyft, whose cars are recognized by fuzzy pink mustaches, is sustaining big losses at a time when venture capital is harder to secure. PHOTO: GETTY IMAGES

By GREG BENSINGER and ROLFE WINKLER

Updated Aug. 2, 2016 12:07 a.m. ET

Uber Technologies Inc.’s retreat from China creates ripples in what will now become its biggest market, the U.S., where it can refocus on its simmering rivalry with hometown competitor Lyft Inc.

The  merger of Uber’s China operation  with Didi Chuxing Technology Co. adds a twist to the rapidly shifting landscape of ride-hailing alliances and brings more uncertainty for San Francisco-based Lyft, which has been shopping for a financier to keep it flush with capital.

Didi  had been Lyft’s biggest ally  after the two companies in recent months  touted an anti-Uber alliance  that would effectively link their apps and share access to passengers traveling abroad. The two companies also teamed up with India’s Ola and southeast Asia’s Grab to make their apps globally accessible.

By tying together their apps, the companies aimed to better compete with Uber. Didi also  is an investor in Lyft .

But Didi now has agreed to align with Lyft’s fiercest rival by combining its operations with Uber’s China business. Uber will receive a 18% stake in Didi, meaning Uber becomes an indirect stakeholder in Lyft. Didi also will invest $1 billion in Uber’s global operations, making Didi both a friend and foe to Lyft.

“Over the next few weeks, we will evaluate our partnership with Didi,” a Lyft spokesman said in an emailed statement. “We always believed Didi had a big advantage in China because of the regulatory environment.”

The deal also means Uber can  stanch the hemorrhaging in China , where it had pumped in billions of dollars. Uber has raised over six times more capital than Lyft, and its  latest valuation of $68 billion far outpaces  Lyft’s $5.5 billion value .

Lyft has been in a bruising four-year battle with Uber for passenger and driver loyalty. The  Wall Street Journal reported in June  that Lyft hired boutique investment bank Qatalyst Partners LP, which is known to help tech companies find a buyer.

Lyft has tried to keep up with its larger competitor as both San Francisco companies pour millions of dollars into subsidizing low-price rides and giving cash bonuses to new drivers.

Uber and Lyft have sought to edge one another out by poaching employees and have accused each other in the past of ordering up fake rides that hinder service. The two firms believe they can be a central means of transportation, rather than just replacing existing taxi services.

FURTHER READING

· Uber’s Retreat Shows Limits U.S. Companies Face in China

· China Circuit: Financial Pressures Shaped Didi-Uber Deal

· Heard on the Street: Why Foreigners Never Win in Tech

· Uber Sells China Operations to Didi

· 5 Things to Know on Uber-Didi Deal

· Didi: Chinese Rival Buying UberChina

Lyft is sustaining big losses at a time when venture capital is harder to come by, likely encouraging the company to find a suitor.

Last year, Lyft posted an operating loss of around $360 million on revenue of roughly $200 million, according to a person familiar with the company’s financial statements. Riders paid a total of about $1 billion for Lyft rides in 2015, and the company kept 20% of that amount as its revenue.

The company has ample cash on hand to sustain itself for now. As of June, Lyft had about $1.4 billion in cash, this person said. It has recently been burning about $50 million in cash a month, according to another person familiar with the matter, suggesting it has more than two years of cash left at that rate. But its spending could go up if the promotional arms race with Uber kicks up a notch, and Lyft is forced to subsidize price cuts.

Lyft does have a major ally in auto maker  General Motors  Co., which invested $500 million for a 10% stake  and indicated the ride-hailing service could be crucial to the future of automobiles. The two companies have since agreed to develop self-driving cars and to offer deals on rental cars to Lyft drivers.

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That partnership is critical in helping bolster GM’s electric vehicle strategy. The auto maker’s battery-electric car, Chevrolet Bolt, was designed with a bigger back seat to better appeal to taxi services, for instance. GM also plans next year to begin testing autonomous electric taxis  in the Lyft network.

With Uber likely returning its attention on the U.S., it is unclear whether GM is interested in buying all of Lyft or increasing its stake. But GM has been involved in several discussions about the company’s funding needs and strategic alternatives, according to people familiar with the matter.

A GM spokesman said the Uber-Didi announcement doesn’t change its strategic alliance with Lyft, and that the companies will continue work on joint projects.

The Uber-Didi tie-up changes the calculus for Lyft’s other China backers. Along with Didi, China’s largest internet companies,  Alibaba Group Holding  Ltd. and Tencent Holdings Ltd., invested  in a May 2015 round  that valued Lyft at $2.5 billion. Those investments were meant to counter Uber’s growth in China.

But Alibaba and Tencent also are investors in Didi and have strategic partnerships including payments services and app integration. So the two internet giants have more at stake in the future success of Didi in China than in Lyft in the U.S. That could put pressure on Lyft and Asian ride-hailing startups to either find new allies or cut a deal with Uber or Didi in the future.

—Rick Carew, Gautham Nagesh and John Stoll contributed to this article.

Write to Greg Bensinger at  [email protected]  and Rolfe Winkler at  [email protected]

Corrections & Amplifications

A person familiar with Lyft Inc.’s financial statements said the company earlier this year was on pace to more than double revenue to around $450 million in 2016, and post an operating loss of more than $200 million. An earlier version of this article incorrectly attributed this projection to Lyft.

TOPICS: Global Strategy

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