Oyo gets board nod to raise $1.5b amid mounting losses

In a move that will pave a way for Oyo Hotels and Homes’ growth amid increasing concerns over its valuation and business model, SoftBank’s star portfolio has received the go-ahead from its board for a US$1.5 billion investment from the Japanese conglomerate and RA Hospitality.

With the new round, Oyo could become India’s second most valuable startup at US$10 billion after Paytm.

Photo credit: Oyo

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 US$52,643.22 apiece. While RA Hospitality, the Cayman Islands-based special purpose vehicle set up by Oyo founder and CEO Ritesh Agarwal for the buyback of shares, has been issued 13,169 equity shares at the same price, said a report by DealStreetAsia.

This comes at a time when Oyo’s losses have increased sixfold. The six-year-old startup reported a net loss of US$332 million for the financial year ended March 2019, compared with a loss of US$50.2 million a year earlier, according to the report filed with India’s Ministry of Corporate Affairs. Revenue from operations surged to US$900 million from about US$197.2 million in FY 2018. 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, local media Economic Times had reported that Oyo was looking to raise US$1.5 billion to fuel its growth in the US and Europe. Of the total amount, Agarwal would be investing US$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, as well as Lightspeed Venture Partners and Sequoia.

This is in line with 26-year-old Agarwal’s plans to invest US$2 billion in Oyo through his holding company RA Hospitality to further increase his shareholding. According to an estimation by travel research platform Skift, after purchasing US$2 billion worth of shares, Agarwal will own 26% of Oyo. This will require a partial purchase of the stakes held by Lightspeed Venture Partners and Sequoia Capital.

To fund the buyback, Agarwal had raised a US$2 billion to US$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 funds, 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, as it not only bleeds back home but also faces pressure from its hotel partners.

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 Tokyo-based corporate lawyer Stephen Givens, there are quite a few striking similarities between the business models of Oyo and WeWork, whose value nose-dived from a whopping US$47 billion.