Why Chinese Regulators are Holding Up Uber's Deal to Leave China

By Markets Fool.com

Not long ago, Uber was celebrating its arrival in the Chinese city of Chengdu. Now, it's eager to exit China -- but the Chinese government might hold things up. Image source: Uber Technologies.

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Uber Technologies' deal to sell its money-burning Chinese operation to rival Didi Chuxing Technology might have just hit a snag: China's Ministry of Commerce said on Friday that it had opened an investigation into the deal, citing antitrust concerns.

If the Chinese government ends up blocking the deal, that will leave Uber in a tough spot.

 

China's antitrust regulators aren't happy with Didi

 

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Anti-trust regulators at China's Ministry of Commerce, or Mofcom, say that Didi should have filed for an antitrust review before it announced the deal at the beginning of August. They want to know why Didi didn't file -- and it appears that they plan to put the deal under close scrutiny.

Didi, which typically enjoys a close and positive relationship with Chinese government officials, said last month that it didn't think the deal met Mofcom's filing requirements. It said in a statement to Reuters that the "trigger requirement for the antitrust process" is only met if both parties involved in the merger have revenue of over 400 million yuan ($59 million). UberChina's revenue in 2015 was less than that, it said.

Apparently, the government disagrees. A Mofcom spokesperson said on Friday that antitrust investigators have interviewed Didi officials twice, and have requested further details on its decision not to file for an antitrust review before announcing the deal.

 

What it means for Uber if the deal is held up

 

The deal to sell UberChina to Didi is extremely important to Uber. Uber spent at least $2 billion in an effort to build out a presence in China and was adding millions more every month, but it wasn't working. The amount of cash Uber was burning was said to be a source of concern for its investors, a distraction from its efforts in more promising regions, and a potential roadblock to an initial public offering.

The announcement that Didi would buy UberChina in exchange for a stake in the combined company and a $1 billion investment in Uber by Didi was seen as a graceful exit -- the best that Uber CEO Travis Kalanick could hope for under the circumstances. In a way, it's a coup for Uber: It will allow the company to focus its still-substantial cash hoard (believed to be about $9 billion) on expanding its reach in the U.S. and in more promising markets abroad.

It also removed a potential sticking point to Uber's widely expected IPO. All of these things add up to a win for Uber and Kalanick, but if Chinese regulators halt the deal, Uber will have to scramble to come up with a Plan B -- and that could be complicated.

 

What happens from here?

 

It's not clear what happens from here because it depends on how Mofcom's investigation unfolds. Mofcom may choose not to take strong action against Didi. Didi is backed by China's sovereign-wealth fund and has long had a close relationship with regulators and government officials. (That's one reason why outsider Uber was at such a disadvantage versus Didi in China.)

From a Chinese perspective, the deal is a big win for Didi and China because it removes a foreign competitor from the playing field. After the regulators have their say, perhaps giving Didi a wrist slap, it seems likely that the deal will be approved.

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