A Few Notes On Uber’s $1.25B New Debt Hopes

News that Uber may raise $1.25 billion through leveraged debt broke this afternoon. It’s, at once, a slightly surprising occurrence and one that isn’t a surprise at all.

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The move may be confusing at first. After all, how can Uber possible need more money after raising from seed investors, angels, traditional venture capital groups, Chinese tech giants, Fidelity, American tech giants, Saudi Arabia, Japanese tech giants’ PE-VC slush funds, and other sources?

At the same time, the company’s debt appetite is also quite in-line with its prior capital consumption. High, in other words, as history shows. And the company’s potential, new debt raise would be merely another in the company’s history.

Indeed, Uber raised $1.2 billion in debt at around a 5 percent rate in 2016. And that capital event followed the firm’s $1.6 billion convertible debt raise in 2015. Morgan Stanley and Goldman Sachs led those, respectively, according to Crunchbase.

Therefore, for Uber to raise more cash through debt fits into the arc of its prior actions. But it’s even more unsurprising than that, at least when compared to other ways of bringing in new dollars.

Please Don’t Reprice Me

Uber’s recent mega-deal with Softbank saw the company raise a $1.25 billion chunk of capital at a flat valuation o $69 billion, give or take. The rest of the roughly $9 billion round was a secondary transaction, where the Japanese conglomerate picked up a double-digit percentage of Uber stock from extant shareholders at a dramatically discounted valuation.

So, SoftBank bought most of its Uber stock at a lower price than its technical sticker value. That fact leads to comments like the following from today’s Bloomberg article concerning Uber’s new debt raise:

The company is tapping a very receptive loan market where investors are willing to gobble up new deals. Uber was given a blended valuation of $54 billion by a SoftBank Group Corp.-led investor group. That makes it the biggest venture-backed technology enterprise without a stock listing.

Something that Uber doesn’t have to do it if raises debt is reprice its equity; the firm can avoid answering the question of what it’s worth. That’s critical for Uber as its top-line valuation is a point of pride and marketing for the company. And down rounds are anathema to morale as employees who count a chunk of their net worth in paper gains on illiquid shares don’t much like those numbers to endure haircuts.

Taken together, Uber’s history of debt raises and valuation complications make the debt choice pretty simple.

But none of that answers the question of why the hell might Uber need more money? Let’s explore that question quickly.

Honey, I Shrunk The Bank Account

Uber’s platform spend expansion, revenue growth, and possibly slowing losses were recurring stories in 2017 as the firm dropped selected performance metrics on a quarterly basis.

The market most recently got ahold of Uber’s Q4 2017 metrics, which, to refresh you, included the following:

• Gross revenue (platform spend): $11.055 billion.
• Net revenue (Uber’s take): $2.224 billion.
• Cost of revenue: $1.100 billion.
• Gross profit: $1.123 billion.
• Operating expenses: $1.731 billion.
• GAAP net income (including non-operating costs): -$1.097 billion.
• Adjusted EBITDA (super, super loose profit metric): -$475 million.

If you aren’t super read up on business fundamentals, that’s a super unprofitable company. (More on why Uber loses money here.)

Notably, the Crunchbase News headline for its report on the results read “Uber Inches Closer To Profitability With Reduced Losses In Q4,” as the company actually did lose less money that quarter than it did in the preceding. It also did so from a higher revenue base, giving it improved profitability margins.

But instead of merely pointing to its GAAP losses (which include non-cash costs) or adjusted EBITDA (a metric so squishy it’s too ethereal for our tastes) when we want to understand Uber’s cash needs, we need something else to lean on.

Luckily Bloomberg reported this week some astounding metrics relating to Uber’s capital expenses to date. Here’s the core piece from the article: “Since its founding nine years ago, Uber has burned through about $10.7 billion, according to a person familiar with the matter.” The piece goes on, in a chart, to note that the $10.7 billion figure is a “cash used” metric. The same chart lists the company as having about $6 billion in cash on hand.

This helps us better understand Uber’s debt intentions, as the firm will need more cash before it goes public (more on that here) or reaches profitability (more on that here). We can infer that given, roughly, its current pace of accounting losses and its cash consumed to date compared to its cash on hand.

So if you need to stack some extra cash, don’t want to sell priced equity, and want to borrow before rates rise, you might want to raise that cash via debt right about now.

And lo, Uber shall raise the debt.