Would a REQX Deal Be Good for Citi Bike?

Rather than simply funding Citi Bike's expansion, Capital revealed today that the venture is in talks to buy a 51 percent stake of the Alta.

Bikes! (Amanda Cohen, the Observer)
Bikes! (Amanda Cohen, the Observer)

Two months ago, The Wall Street Journal reported that the troubled Citi Bike program had found a potential investor to pay for its expansion—the first phase of which is expected to cost some $20 million—with REQX, a joint venture of an investment firm formed by the upscale fitness center chain Equinox and its parent, Related Cos., playing the role of white knight.

Today, however, Capital New York revealed that the terms of the deal more closely resemble a buyout than a sponsorship, with REQX purchasing a 51 percent share of Alta Bicycle Share under the current deal, the terms of which remains tentative. REQX would not only gain control over Citi Bike, but also Alta’s bike share systems in Washington D.C., the Bay Area, Boston, Chicago and several other cities.

The deal would mean an infusion of cash into a program that struggled to break even during its first year; as Capital reported this spring, Citi Bike’s start-up and operational costs exceeded expectations by $9 million during the program’s first four months, however many of those costs were occasioned by non-recurring circumstances, including Hurricane Sandy. However, it is unclear if REQX taking the reigns would do anything to speed or specifically enable Citi Bike’s expansion.

Capital reported that REQX would install new software, stabilize the system’s finances with rate increases “and also perhaps expand it.”

Though Citi Bike is the only bike share program in the country not to receive public funding, it certainly seems that the program has the potential to be a going concern—as a private company Alta does not have to reveal its finances—and if and when the many difficulties that accompanied its launch are finally ironed out.

Since launching a little more than a year ago, New York’s bike share system has been both beset and buoyed by its massive popularity, which exacerbated the program’s numerous operational and technical difficulties. Software problems, in particular, continue to dog the program. (Alta’s equipment manufacturer Bixi split with its software provider 8D Technologies a short time after New York signed the contract with Citi Bike; the software developed by Bixi after the split has been flukey, a problem likely exacerbated by Bixi’s subsequent bankruptcy.)

The program has also been surprisingly popular with annual users, underlining the value of bike share to the city and at the same time hurting Citi Bike’s bottom line; the program’s profitability is pegged to its ratio of casual to annual users, with casual users paying a much higher rate—a day pass costs $9.95—which is intended to help subsidize the $95 annual memberships. (Software issues also rebuffed would-be casual users, with credit card readers at many docking stations—the only way that non-annual members can access the bikes—being perhaps the most persistent of the many software issues.)

Citi Bike has discussed raising the cost of annual memberships in the past, a move that city officials have resisted, wanting to see if the program can find its financial equilibrium before raising fees. (It is unclear from the the original contract if Citi Bike requires city approval to raise rates.) However, the REQX deal, according to Capital, would explicitly allow rate increases without city approval “though the contract might include some sort of percent-per-year cap on the size of those hikes.”

In other words, it appears that REQX would stabilize a struggling program—which would be undeniably good—but it would not necessarily support Citi Bike’s expansion, the first stage of which had been initially been expected to happen this year. Which is not surprising—sponsorships rather than operational revenues were intended to fund expansions, it’s just that sponsorships beyond the initial Citi Bank and Mastercard ones have proven elusive.

The pending REQX deal also seems to supply something of an answer to a question that everyone has been asking since Citi Bike launched last year: can the program be a self-sustaining operation without public funding? The answer is a qualified yes. Yes, it probably can, though, perhaps not in the fashion or on the scale that New York had hoped for. Would a REQX Deal Be Good for Citi Bike?