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Here’s what you need to know about SoftBank’s tender offer for Uber coming tomorrow

It’s time to see if investors will sell or hold onto shares of the troubled car-hailing giant.

Uber CEO Dara Khosrowshahi onstage at the New York Times 2017 DealBook Conference
Uber CEO Dara Khosrowshahi
Michael Cohen/Getty Images for The New York Times

Investors who have poured over $10 billion into Uber over the last eight years have stomached scandals and soap operas of every kind, including the noisy ouster of its CEO Travis Kalanick.

But tomorrow, they’ll find out if all that trouble was worth it — or if they’ll have to wait even longer for the big payoff.

Tuesday is when a multi-billion dollar “tender offer” from Japanese investment giant SoftBank is expected to begin, according to sources tracking the process, giving Uber shareholders the chance to sell some of their stock or hold fast until the company goes public. The decision essentially asks every Uber insider to gauge their confidence in the company they built.

SoftBank and other new investors are hoping to purchase up to 20 percent of Uber, which has most recently been valued at $70 billion. The twist? The group has signaled that they are only willing to offer a share price that would value the company at around $50 billion.

That means if enough existing shareholders decide that the discount is too steep, the deal could crumble — setting off a cascade of problems at Uber ranging from how to solve its troubled governance to how it can continue to grow as fast without more funding.

It’s also the first major reckoning for newly installed CEO Dara Khosrowshahi, who is banking on pulling off the deal smoothly to get Uber past its incessant and damaging drama and toward a more stable future.

But nothing involving Uber is ever easy, is it? So, here’s what Recode is watching for and hearing from sources ahead of the launch of this massive transaction:

Who is selling?

Under the terms of the deal, the SoftBank-led group will only move forward if it can cobble together at least 14 percent of the company’s shares, although it seeks more ownership. That’s why the back-channeling among Uber shareholders about who might be selling and who might not be has become so intense and confusing.

The likeliest group of sellers are early employees — assuming they have more than 10,000 shares — many of whom are expected to part with at least some of their positions. The program would look similar to Facebook employees’ cash-out to Digital Sky Technologies in 2009. But Uber employees’ shares together only add up to a few percentage points at best.

And later investors, who bought shares of Uber at a valuation higher than $50 billion, are unlikely to want to book a loss and sell.

So that’s why the deal largely rests on a half-dozen of the company’s biggest owners and earliest backers. Those powerhouse investors include Benchmark, First Round Capital, Lowercase Capital, Menlo Ventures and Google Ventures, as well as key Uber players, most especially founders Garrett Camp and Kalanick.

Kalanick has told associates in the past that he has no plans to sell any of his 10 percent ownership of the company. And even though parting with a small fraction could make him a billionaire, sources said it is still not clear if that position has changed. No surprise, sources close to the situation remain wary of what the fractious entrepreneur will do. Most do expect the more cooperative Camp, however, to sell at least some shares — and he has a big chunk to offer.

Google Ventures, which led a $250 million round in Uber in 2013, is assumed by many to be a seller, especially given the tension between Uber and Google’s parent company, Alphabet. Another complication: Alphabet’s other investing group, CapitalG, also recently led a $1 billion investment round in Uber’s archrival, Lyft.

Sources said Benchmark, which has a 13 percent ownership percentage, is more likely to sell now that it has secured some governance reforms that it had pushed to restrain Kalanick amid a bitter war with him. But the venture firm has also said it believes its most famous portfolio company is on pace to be worth over $100 billion — which would appear to be merely a negotiating posture if the venture firm then agreed to a 50 percent haircut.

Menlo, First Round and Lowercase have attracted less attention than either Benchmark or Kalanick, but could very well be the swing votes in whether the sale is successful.

Menlo — whose 2011 investment was led by a Kalanick ally, Shervin Pishevar, who has since left the firm — is likely to sell at least some of its holdings, sources said.

First Round has appeared somewhat divided on whether to collect on any of its massive return, which was accumulated by leading its seed round in 2010 when the company was valued at only $4 million.

Even less likely to sell at the proposed valuation is Lowercase, the fund steered by early Uber investor Chris Sacca, which joined Benchmark’s financing round in 2011.

Can Dara pull it off?

The transaction is a major leadership test for Khosrowshahi, who has pushed the company’s investors to not just consider what is good for their limited partners, but also what is good for the company.

The new CEO has encouraged all of Uber’s biggest shareholders to sell at least a little of their holdings, multiple sources said, in order for the new buyers to reach the 14 percent threshold needed to trigger the sale and, more importantly, the governance reforms.

The deal would also give Khosrowshahi an ally in SoftBank and its powerful CEO, Masayoshi Son, who has been investing hundreds of billions of dollars in tech around the globe. Son has repeatedly said he could invest in Lyft should the Uber transaction fall through, although a few Uber insiders treat that as a deft negotiating ploy.

The obvious challenge for Khosrowshahi is that shareholders could balk if the Uber pricing is too low. While the exact terms are still a mystery to even its largest shareholders, sources said the current pricing is expected to value Uber at between $48 billion and $52 billion.

And, despite months of wrangling, the price remains largely where it was when the broad outlines of the deal were struck almost two months ago. With Uber on what appears to be an upswing — with strong growth and a respected new leader and management — several current shareholders think that selling is an unwise idea before Uber’s expected IPO in 2019.

SoftBank has also pushed an anti-collusion provision that has sought to prevent sellers from formulating their minimum price for selling. That means it has no clear way to discern what is posturing by stockholders and what is any real discomfort with the terms — which could lead to an ill-informed underbid when the price is set on Tuesday.

If the first tender process, which will last for 20 business days, fails, then SoftBank will have the chance to try again and raise its offer price to attract more sellers.

Is there a hacking discount?

And then there is last week’s disclosure that Uber had been the victim of a massive data breach, which has once again trained investors’ ire at Kalanick, who oversaw the company’s cloddish response to the hack in 2016. That response included paying off the culprits.

That news — released by Khosrowshahi — could impact both Uber buyers and sellers as they decide how much the ride-hailing giant is truly worth. Could it trigger an argument that the pricing is actually too high and that there are still more Kalanick-era skeletons to emerge from the closet? Yes. Will it ratchet up pressure on Kalanick to reduce his ownership control in the company? Maybe. Will it be seen by current investors as a cynical way to get them to take a discount? Who knows.

All that is clear is that the next chapter in the Uber drama starts tomorrow.

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