Grab-GoTo merger a quick fix but hard sell

SOUTH-EAST Asia’s ride-hailing giants are at it again. Singapore’s Grab and Indonesia’s GoTo have reportedly restarted talks for a mega merger, three years after serious negotiations fell through.

The companies are in preliminary discussions about a range of scenarios, Bloomberg reported on Feb 9. Grab could acquire GoTo using cash, stock or a combination of the two, the report said, citing unnamed sources.

GoTo has denied that it is in any discussion with Grab. Still, it is easy to see why both companies would explore the possibility of a merger now.

Ride-hailing and on-demand delivery have long thrived on scale and efficiency. Yet about 12 years on, both Grab and GoTo have yet to achieve the kind of quality large-scale operations needed to turn a net profit.

Their venture into the public market showed that investors expect much of the companies – and have plenty of other options for stock-picking if they are unable to deliver. Grab shares are down 59.7 per cent since listing on the New York Stock Exchange in December 2021, while GoTo is down 75.1 per cent since its initial public offering on the Indonesia Stock Exchange in April 2022.

Plagued by uneven market forces and fierce competition, the companies discussed a merger in 2020 before going public, but called it off due to various reasons. So, what’s different this time?

Over the past year, the pressure to turn a profit has gotten more intense. All of South-east Asia’s tech majors, including Sea, have promised to hit profitability targets.

GoTo, a combination of on-demand services company Gojek and e-commerce company Tokopedia, last month said it hit positive adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) in the fourth quarter. It has not disclosed any figures.

Meanwhile, Grab achieved positive Ebitda in Q3 and aims to deliver free cash flow towards the end of this year.

Balancing act

These milestones have come at the price of massive headcount slashing and organisational restructuring. The companies have also had to reduce incentives; meanwhile, growth in gross merchandise value is slowing.

Being able to maintain lean operations is a great sign. But some industry players may argue that short-term profitability targets put the company at odds with the goal of leveraging economies of scale.

Globally, companies operating on-demand services have struggled the most with growing scale with good density and “stickiness” of the platform. That is, maintaining a user base that consistently pays even without frequent nudges of incentives.

China’s Meituan has been consistently profitable. In 2019, it reversed from a loss to post a full-year net profit of 2.2 billion yuan (S$439.3 million).

Food delivery, which accounted for 56 per cent of revenue, yielded a gross profit margin of 18.7 per cent. Notably, such margins in food delivery were achieved only after Meituan managed to scale up sufficiently to 450.5 million transacting users, 6.2 million active merchants, and an average of 27.4 transactions per annual user as at end-2019.

The company had about 70 per cent of China’s delivery market share in 2022, data from research firm ChinaIRN indicated. Meituan also benefits greatly from its high-margin business of providing merchants a platform to market their services and goods.

Meanwhile, Uber finally posted its first full-year profit earlier this month. Its 2023 net income was US$1.9 billion, reversing from a US$9.2 billion loss that included a US$7 billion hit from revaluations of equity investments.

Uber’s executives have spoken at length about cross-promotions at scale across business segments helping to drive efficiencies for user acquisition. Monthly active platform consumers have grown from 91 million at the end of 2018 before its public listing, to 150 million as at Q4 last year.

Grab has reportedly been in talks to acquire foodpanda’s South-east Asia operations and plans to take over Trans-cab in Singapore, so it is clear the company is open to acquiring scale inorganically.

Hurdles remain

Will Grab and GoTo see past their differences this time and finally combine? To be sure, boosting market share and cutting out the rivalry that has been dampening prices is not a sure-win solution. The ride hailing and delivery business is more complex than that.

But it is certainly a huge advantage, and one definitely not missed by dealmaker Patrick Walujo, the Gojek investor who now heads GoTo as its CEO.

The private equity veteran is no stranger to brokering mega deals. GoTo recently completed a unique deal where Tokopedia and TikTok Shop Indonesia merged under the Tokopedia name, with TikTok taking a 75.01 per cent stake in the entity.

Walujo was happy to hand the e-commerce reins over to the social media giant and benefit from the financial flows. It is perhaps better to still be part of the game than to be booted out of the narrative.

This deal may already have paved the way for segmentation of GoTo’s businesses to maximise returns. It is not unimaginable that Walujo could help whip up a merger structure where both parties bite.

Still, some things have not changed. When news leaked of Grab and Gojek’s talks in 2020, it sent the industry into uproar.

Drivers across markets protested and regulators made it clear they would not stand for a monopoly. It would take much convincing for the different stakeholders to give a green light, especially as consumer protection becomes a hairy topic amid economic pressures.

Then there is the question of the crown jewel of Indonesia, a country with more than 270 million people. Three years ago, the talks reportedly fell through partly due to disagreement over how to handle control in that market.

Since then, the attractiveness of Indonesia has only grown. More people are using digital services and fintech than ever before. How will both companies draw turf lines – or collaborate?

Grab and GoTo need a catalyst to capture investor interest once again. If there is a mega-merger in the works, it is bound to be a landmark deal that will take absolutely everything for it to cross the line.