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Grab Holdings, Southeast Asia’s largest ride-hailing firm, plans to merge with Altimeter Growth Capital, based in the United States, in a deal worth approximately $40 Bn and allowing it to trade on the Nasdaq Stock Exchange.
If it goes through, this SPAC deal will be the largest ever U.S. equity offering by a South-East Asian firm, with the planned deals giving Grab a Pro-forma equity valuation of about $39.6 Bn. Grab will earn up to $4.5 Bn (SGD 6.05 Bn) in cash as part of the SPAC contract. BlackRock, T. Rowe Price, and Fidelity are among the large institutional investors who have poured money into the offer.
Can Grab justify its supercilious valuation?
We Know that Grab has a huge dominance over the South East Asian market and is also a fairly good company but the real thing to ask is that how justified it is to give a massive valuation of around $40 Bn? Is there anything for the investors to be happy about their investment in the company? If we go with the past history of Grab including the recent Private Investment in Public Equity round where it raised around $4 Bn. A total of around $17 Bn has been raised till date in 19 rounds which is way more than any other Southeast Asian startup which suggests that they have raised a huge amount from the market so far.
We believe there’s already a saturation with respect to the addressable market size. Grab has already conquered most of the market in the field with 66 concurrent rides in one second across seven countries, occupying 97% market share in the third-party taxi-hailing market and 72% in the private vehicle hailing market. This data suggests that the company already has attained a humongous market share. Despite this fact, inflating its valuation to $40 Bn seems difficult to digest making it too rich a stock.
The scale of its multi-faceted business model
Grab is Southeast Asia’s leading ride-hailing network, headquartered in Singapore with services including ride-sharing, food delivery, taxi booking, insurance, bill payment, and more. In 2018, Grab bought Uber’s entire Southeast Asia ride-hailing service in 2018.
Grab charges a 16% to 25% commission for using their services. It has around 3.5 million drivers in Malaysia, and the minimum ride cost is RM5. After a 25% cut (RM1.25), the company would gain around RM4 million if every driver gets a verified ride.
Any time the driver completes a booking, the credits deposited by the driver will be deducted in the same amount. In Singapore, Grab offered $4.30 to $5.70 for each ride last year; such offers could cost the company millions per month. Grab does not provide travelers with free or discounted rides.
Consider another example, the average gross earnings of a full-time (12 hours) driver in a month is $1435 — $1670. After a 25% commission cut, drivers will earn $1795 — $2088. Based on this, Grab would have gotten about $360 — $418 of commission from a single driver.
Scale and Leadership in South East Asia (Source: Grab S-1)
Dominance in the Southeast Asian Market
Since launching in 2012, Grab has evolved from a humble taxi-booking app to Southeast Asia’s largest land transport company, with over 200,000 drivers and over 11 Million mobile downloads.
Since mid-2015, GrabCar rides have increased by 35% on an average monthly basis, while GrabBike rides have increased by 75% on an average monthly basis. Ride-hailing services have become invaluable to Southeast Asia’s infrastructure, and the region’s industry has been shaken by the sudden emergence of now-dominant player Grab. With the departure of Uber Technologies of the United States, the sector is entering a new era of competition. Grab will not go unchallenged, and will need to prepare for competition from new corners and in new fields as it expands beyond its core business.
Stellar growth with no profitability
Though Grab currently is far off from achieving profitability in its financials, it has been growing tremendously in the past few years. Recently, the coronavirus pandemic has spurred growth in Grab’s food and grocery delivery business, turning them into some of the company’s biggest revenue streams.
Mobility segment profit and EBITDA (Source: Grab S-1)
Through the SPAC Merger, Grab will have hands-on cash proceeds namely, $4.0 Bn (SGD 5.37 Bn) in fully committed PIPE financing, led by $750 Mn (SGD 1.07 Bn) from Altimeter Capital Management, LP, the firm that owns Altimeter Growth Corp.
Snapshot of key financial metrics:
- Revenue: $1.19 Bn in 2020, up from $455 Mn in 2019.
- Loss: $2.7 Bn in 2020, which was $4 Bn in the year 2019.
- Profits: The company is also expecting its earnings before interest, taxes, depreciation, and amortization to turn profitable by the year 2023.
Grab’s edge over its competitors
Grab has a lot of benefits, most of which include easy booking, insured drivers, rider ratings, and low or at least confirmed wait times.
Positioned as a forum for a variety of services; Grab offers:
- Licensed and Insured Drivers: Grab drivers must register as a local business, convert their vehicle to a commercial vehicle, sign up in person at the Grab office, and buy commercial insurance to protect themselves and their property. If you use GrabTaxi, you will only be connected with licensed taxi drivers, not novice ones.
- Flat rate fees: Grab charges a flat rate that you can see before you ride. This feature removes the element of surprise from many taxi fares and helps you to choose the best ride for your budget. Shorter wait times — With over 30,000 drivers in 30 cities, Grab rides are readily available.
- Accessibility as a Super App: The network effects are one of the most important force multipliers for the business model of a super-app, which Grab is positioning itself as. i.e., as there are more rides available at any given time, more people can use services like ride-hailing from you, which makes it lucrative for drivers to register on your platform.
Concerns surrounding Grab’s SPAC merger route
Getting regulatory approvals for an IPO would have been difficult for a cash-burning business like Grab (where all the promised land of gold is in the forecasts and excels). Recent cases, such as WeWork’s failed IPO, are fresh in the minds of aspiring public companies. When there are no positive cash flows, it is easier to sell the forecasts to a SPAC rather than the general public. The markets are overflowing with the supply of cash-rich SPACs looking for big enough startups to invest in.
However, because of the SPAC’s nature, many aspects are inherently opaque, making it easier for big companies to dupe retail investors. In the case of a SPAC, unlike a conventional IPO, a company decides on the valuation, and if Grab had chosen a traditional approach, it would have been impossible for the company to achieve the same in such a short span of time.
SPACs are appealing to people who want to go public in a volatile market. IPOs are considered riskier because there is always a possibility that the papers will not be accepted until they are filed publicly. The same thing happened with WeWork’s IPO, which was canceled after the company’s details were made public and investors were forced to withdraw.
Some other relevant concerns that will arise post Grab’s SPAC Merger:
- Disproportionate Voting Rights: The founder Anthony Tan will receive a voting share that is 30 times greater than his equity stake in the company as a result of this transaction.
- Grab’s Cash Burn: Grab is at a point in its growth where it has a high valuation but is also cash flow negative. Shares in the SPAC that were purchased at the start of the company can be redeemed. If redemptions meet forecasts, cash availability becomes unpredictable, forcing SPACs to seek PIPE funding to make up the difference. Grab’s cash burn may be exacerbated by this contract.
- Shareholding Dilution: SPAC sponsors usually hold a 20% stake in the SPAC in the form of founder stock, or “promote,” as well as warrants to buy more shares. They also benefit from an earn-out component, which allows them to gain more shares if share prices reach a certain level. This could result in more dilution, which could lead to mismanagement at Grab.
Should you invest?
Despite being Singapore’s largest unicorn, Grab, like many other startups, is still burning cash and isn’t expected to turn EBIDTA positive until 2023, according to Moody’s. Grab’s value has more than doubled to $39.6 Bn, up from $16 Bn in the last round of funding. Grab, on the other side, would have $4.5 Bn in cash on hand.
At more than 3 times its GMV, the company’s valuation leaves very little space for new investors, at least for the time being.
A lot would hinge on Grab’s ability to maintain its remarkable 96% CAGR in net sales over the last three years. The company may lose some of its moats in the long run as a result of legislation, market changes such as customers shifting away from ride-sharing, and competition from other regional players such as Gojek, Urge, and others.
A long way to go
SPAC Mergers are seen as a simple way to avoid the conventional IPO enforcement procedures. Many critics believe that the SPAC merger is used by low-performing companies that have no other way to get listed on the stock exchange. Even though the company has a positive outlook, it is still too rich, driving such a large valuation, encompassing negative returns (EBITDA), and generating negative emotions among many investors.
Grab’s valuation premium will take some time to catch up with the promised cash flows. However, the sheer potential of being in inherently high-growth markets with penetration levels in the single digits and lower double digits, combined with technology-enabled day-to-day services and Fintech solutions for markets with very low banking penetration (only 40% penetration), could eventually propel Grab to emerge from a long list of failed SPAC mergers. For the time being, the valuations are on the verge of becoming a bubble, and they are still pricing in a lot of stuff happening for Grab, making us cautious to dive deep into the Grab SPAC at the moment.
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