Just like any investors out there, when I first heard of the tie-up between Uber and Comfort-Delgro (CDG), my first question was – “Is it really a good deal for CDG?” Valued at $642m, CDG is to pay $295m in cash for 51% of Uber’s stake in Lion City Holdings (LCH). The deal is likely to make CDG swings from a cash-positive company to a cash negative company after taking into account of all of its debts. LCH owns and operates Lion City Rentals (LCR) which has 14,000 vehicles in their stables. Of course, the deal comes with sharing of resources such as centralizing the fleet management to dispatch vehicles as well as sharing the servicing facilities and consumables. While, it enables CDG cabbies access into Uber’s database and vice versa, I am not exactly sure if the benefits are that direct as against giving more incentives to the taxi drivers, such as cash rebates, reduced taxi rentals and incentives to retain existing drivers in order to buy time for CDG to develop more concrete business ideas to counter the more potent threats from Grab. There is always a limit in which one can drive on the road irrespective of the demand. As one of the biggest, if not the biggest, transport company in the world, does it really benefit from the deal by buying into a car rental company? It is indeed like trying to enlarge the world’s biggest airport when not many airplanes call in it. The solution would have been more direct to bring more drivers to take advantage of the platform through more direct cash incentives. Perhaps the main consideration for CDG is the worry of losing the taxi-rental revenue, but so far its answer to the eroding taxi rental seemed not been able to nip the problem at its bud. The crux of the issue is not the lack of vehicles, but a lack of drivers. They are unwilling to pay for a higher taxi rental when there is a cheaper alternative to rent either a taxi or a rental car somewhere.
The way it is, the collaboration with the once-upon-a time competitor is only a part solution, perhaps a comparatively lesser one. In fact, putting Grab and Uber side by side, the threat from Grab seemed to be more lethal than from Uber. Grab has good funding supports and is willing to get things done even at the expense of steep losses while Uber has been infested with many more pertinent issues such as operational problems and their ‘mis-steps’ with the various local authorities in many parts of the world. The loss of the taxi rental business in Singapore seemed to be more important to CDG than to Uber. Perhaps, to Uber, it only shaves off 1-2% percent off their financial statements at most and that is why CDG seemed to be getting the shorter end of the stick at least from an observer’s point of view. Meanwhile, Grab seemed to be able to initiate better solutions such as to collaborate with the taxi companies other than CDG to level-up the playing field. In fact, the several initiatives offered by Grab appeared to be extremely lethal to CGD. It gave special incentives to CDG cabbies that are willing to crossover to the Grab camp. The impact appeared to be more direct, and that probably accounted for the 14% decrease or a reduction of 2,416 operational taxis from 16,722 to 14,306 to date. With an enlarged set of drivers and with more taxi companies joining its stables, it formed a huge firepower base to cripple the once-upon-a-time untouchable rental taxi structure of CDG. More recently, it took advantage of the more frequent MRT train break-downs to work with SMRT by offering more immediate solutions to irate commuters who were either stuck during those breakdowns as well as to those who were taken by surprises of the temporary earlier closing hours or later opening hours of the MRT stations.
Even with a few technocrats who threw their weights behind the deal, I am still of the opinion that there is really nothing to celebrate about for CDG. Perhaps, these experts drive their own cars.
Disclaimer – The above arguments are the personal opinions of the writer. It is not a recommendation to buy or sell the mentioned security.
Brennen has been investing in the stock market for 28 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.