By Eric Auchard and Anastasia Teterevleva
FRANKFURT/MOSCOW (Reuters) - Uber and Yandex, the "Google of Russia", have agreed to combine their Russian ride-sharing businesses, with Yandex the leading partner in a deal that extends to five nearby markets.
The deal marks another pullback from Uber's breakneck global expansion, a year after its exit from China, though it does have potential upside for the Silicon Valley online taxi hailing pioneer, based on its 36.6 percent stake in the merged company.
For months, Uber has struggled with legal setbacks, accusations of a sexist work culture and driver protests, culminating in the June departure of co-founder and CEO Travis Kalanick under investor pressure.
Shares in Russia's largest internet company leapt almost 20 percent as investors bet the deal could accelerate the move of Yandex's taxi business into profitability.
Thursday's agreement follows the recent merger of rival Russian taxi players Fasten and Rutaxi, marking a rapid consolidation of the market.
"With this deal Yandex eliminates an aggressive competitor which, in the long run, will lead to improved monetization and profitability," said Sergey Libin, an analyst with Raiffeisen Bank in Moscow. "It's a good deal."
San Francisco-based Uber has agreed to invest $225 million (13.5 billion rubles) while Yandex will contribute $100 million into a new joint company in which Yandex will own 59.3 percent and employees will have a 4.1 percent stake.
In a joint statement, Yandex and Uber said they would join forces in Russia, Armenia, Azerbaijan, Belarus, Georgia and Kazakhstan to create a new company operating in 127 cities, in a deal expected to close in the fourth quarter.
Yandex.Taxi Chief Executive Tigran Khudaverdyan will become the CEO of the combined business and Yandex will consolidate the new company's results in its financial statements. Yandex will hold four board seats, with Uber holding three, they said.
Uber will contribute its UberEATS food delivery business in the six-country region to the new venture.
"There is ride-sharing and food delivery and beyond that there are also numerous opportunities in logistics that we will explore," Yandex Chief Financial Officer Greg Abovsky said on an investor call. Abovsky added the combined company could be spun off with a separate stock listing in a few years.
The share move for Yandex, known as the "Google of Russia" for its dominance of the region's web search, maps and mobile navigation markets, signals that roughly half of the company's market capitalization lies in investor hopes for its taxi unit.
Otkritie brokerage analyst Timur Nigmatullin estimated that, before the deal, Yandex.Taxi represented around 20 percent of the parent company's market capitalization. Otkritie estimated the combination could push the taxi business into profitability by 2018 or 2019.
Based on the valuation of the combined company and Yandex's share in it, he said the taxi business now accounted for up to 50 percent of Yandex's equity value, which after Thursday's 18.75 percent rise hovered about $10.5 billion.
Uber said the merger did not imply a strategy of further retrenchment elsewhere. Indeed, financial terms of the deal make it a lucrative one, it said.
"This is an exciting opportunity in a unique situation and our operations in other countries will not be affected," Pierre-Dimitri Gore-Coty, the head of Uber in Europe, the Middle East and Africa, said in a blog post addressed to Uber employees.
Gore-Coty said Uber's 36.6 percent stake was worth $1.4 billion, based on an agreed valuation of $3.725 billion for the combined company.
That marks a sizeable gain on the $170 million Uber invested since entering the region three-and-a-half years ago, even with the new $225 million investment.
Uber sold its Chinese business to far larger local rival Didi Chuxing a year ago in return for a 17.5 percent stake in Didi which as a whole was then valued at $35 billion.
While Uber no longer exists in China, the paper value of its stake in Didi has risen to around $8 billion from $6.1 billion, based on Didi's recent funding round valued at $50 billion.
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The unified business in Russia and nearby markets also helps Uber become more sustainable, Gore-Coty said, by helping it cut losses as part of a global drive toward eventual profitability.
Uber said in May its net loss, excluding employee stock options and other items, narrowed in the first quarter to $708 million from $991 million in the fourth quarter. This week, it told investors that losses continued to decline in the second quarter, a source familiar with the report said.
The ownership stakes reflect how Yandex.Taxi is roughly twice the size of Uber in the region as measured both in terms of rides and gross bookings, the companies said.
Yandex and Uber compete in Russia with rivals including Fasten/Rutaxi, Maxim and Gett, the Israeli startup backed by German automaker Volkswagen <VOWG_p.DE>.
Yandex.Taxi, which was founded in 2011, is active in 127 cities across the region. Uber, founded in 2009, is active in 16 cities in Russia and five cities in Azerbaijan, Belarus and Kazakhstan. Uber does not now operate in Armenia or Georgia.
Russia's federal anti-monopoly regulator said the deal could pose risks to competition and a thorough analysis was needed before it could be approved, local news agencies reported.
Following completion, passengers will be able to continue to use either Yandex or Uber apps. The driver apps of the two companies will be integrated into a single app for greater efficiency, the companies said.
Uber operates in nearly 600 cities worldwide.
(Reporting by Eric Auchard in Frankfurt and Anastasia Teterevleva, Maria Kiselyova and Anna Pruchnicka in Moscow; Editing by Keith Weir and Mark Potter)