In a move that will pave a way for Oyo Hotels and Homes’ growth amidst growing concerns over its valuation and business model, SoftBank’s star portfolio has received a go-ahead from its board for USD 1.5 billion investment from the Japanese conglomerate and RA Hospitality.
With the new round, the six-year-old company has become India’s second-most valued startup at USD 10 billion after Paytm.
In a special resolution passed at an extraordinary general meeting of shareholders, 15,325 Series F compulsorily convertible cumulative preference shares (CCCPS) were issued to SVF India Holdings Cayman Islands-registered entities at a price of USD 52,643.22 a share. While RA Hospitality, the Cayman island based special purpose vehicle set up by founder and CEO Ritesh Agarwal for buyback of shares, has been issued 13,169 equity shares, at the same price, said a report by Deal Street Asia.
This comes at a time when the company’s losses have increased six-fold. The startup reported a net loss of USD 332 million (INR 23.85 billion) for the financial year ended March 2019, compared with a loss of USD 50.2 million (INR 3.6 billion) a year earlier, according to the report filed with India’s Ministry of Corporate Affairs. Revenue from operations surged to USD 900 million (INR 64.57 billion rupees) from about USD 197.2 million (INR 14.13 billion) in FY18. Oyo’s internal projections show that it may not make a profit in India and China until 2022, a Reuters report said.
In early October, a local media Economic Times had reported that Oyo was looking to raise USD 1.5 billion to fuel its growth in the US and Europe. Of the total amount, Agarwal would be investing USD 700 million, almost doubling his stake to 18.03% in the company from 9.43%. The rest of the money would come from its largest investor SoftBank Vision Fund, Lightspeed Venture Partners, and Sequoia.
This is in line with 26-year-old Agarwal’s plans to invest USD 2 billion in the company through his holding company RA Hospitality to further increase his shareholding. According to an estimation by travel research platform, Skift, after purchasing USD 2 billion worth of share, Agarwal will own 26% of the company. This will require a partial purchase of the stakes held by Lightspeed Venture Partners and Sequoia Capital.
To fund the buy-back, Agarwal had raised a USD 2 to 2.2 billion debt from a consortium of Japanese financial institutions, including Nomura Holdings and Mizuho.
“Our immediate goal is to make forward-looking investments so we can achieve our mission while delivering on our fiduciary responsibility to our investors by building a sustainable business,” Agarwal had said in a media statement in October.
Oyo claims to be the world’s third-largest hotel chain with roughly 1 million rooms, including vacation homes, trailing behind Marriott International and Hilton Worldwide. Flush with the fresh funding, Oyo’s Agarwal aims to make the company the biggest global hotel chain by 2023.
“It’s very hard to put a limit as to the kind of growth, return, the market share that these guys could achieve,” Munish Varma, managing partner at SoftBank’s Vision Fund told Financial Times in a recent interview. “If you have a product that serves a purpose and solves a very real consumer need . . . why should you not expand?”
However, many have raised concerns over Oyo’s global expansion spree, while it not only bleeds back home, it’s facing pressure from its hotel partners as well.
Select hoteliers across India and the US are boycotting Oyo over its alleged unethical and forceful business tactics. Moreover, there are growing concerns around the hotel booking platform’s overvaluation and its similarity to the business model of WeWork, the co-working giant that had to postpone its initial public offering earlier this year due to flawed unit economics.
According to a Tokyo-based corporate lawyer Stephen Givens, there are quite a few striking similarities between the business models of Oyo and WeWork, whose value nosedived from a whopping USD 47 billion.
There are three symptoms that stand out, Givens said in a recent opinion post for Nikkei Asian Review. “First, a questionable business model; second, Oyo’s numbers, and in particular its shockingly small revenue; and third, a heady valuation propped up by a financial maneuver previously used by SoftBank family members,” he wrote.
WeWork, which grew at a lightning pace over the last few years, just like Oyo, had to be bailed by SoftBank with USD 9.5 billion rescue package. It is also massively downsizing its team globally.
Moreover, Oyo is now under investigation by the Competition Commission of India, the South Asian nation’s antitrust watchdog following a complaint by industry body Federation of Hotel and Restaurant Associations of India (FHRAI).
The hotel association has accused Oyo of “contract breaches, arbitrary commission rate changes, stoppage of minimum guarantee amounts, and threatening legal notices among other things,” according to an Economic Times report. FHRAI also claimed that more than 500 hotels across 100 cities have snapped ties with Oyo since April as the relationship has soured after various disputes. Oyo has denied all the charges as well as the numbers, citing them to be “incorrect” and “inflated”.
