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Ritesh Agarwal’s $2 Billion (Y)OYO Spin: A Share Buyback To End All Buybacks

Skeptics may question Oyo’s valuation and deal mechanics, but Ritesh and SoftBank are putting their money where their mouth is.

Ritesh Agarwal, founder and CEO of OYO Hotels & Homes, at the SoftBank World 2019 event in Tokyo on July 18, 2019. (Photographer: Akio Kon/Bloomberg)
Ritesh Agarwal, founder and CEO of OYO Hotels & Homes, at the SoftBank World 2019 event in Tokyo on July 18, 2019. (Photographer: Akio Kon/Bloomberg)

What happened? — In a landmark move, OYO Hotels & Homes announced that its Founder and CEO, Ritesh Agarwal, through RA Hospitality Holdings (Cayman), has signed a $2 billion primary and secondary investment in the company. He is buying out 15 percent of the company from existing investors Lightspeed and Sequoia and investing $500 million to acquire another 5 percent.

Why does it matter? — $2 billion or Rs 14,000 crore is a lot of money! This is the single biggest founder-led transaction in India and arguably one of the biggest in the world. It seems other worldly in an environment where daily headlines talk about leveraged transactions backed by shares gone horribly wrong.*

This is a surreal moment for long-time venture investors like me. A $2 billion buyback in the Indian venture ecosystem – no one could have even dreamt of this!

On one hand, it signals a coming of age for Indian founders. Founders like Ritesh Agarwal, Bhavesh Agarwal and Vijay Shekhar Sharma are now taking charge and driving their agendas despite the presence of large investors in their companies. Recently, there has been a lot of debate on the need for instruments to help founders in retaining control of their companies for longer. A revised DVR mechanism is being discussed. I was one of the early voices in the debate and had pointed out that apart from mechanics, Indian founders also needed to have the gumption to keep control. This transaction is a step in that direction. Where there was a will, there was a way.**

On the other hand, there is a nagging feeling – is this too good to be true? Is this being driven by the same investors with founders as a front?

There are no definitive answers. However, what is clear is that just like WalMart buying Flipkart for $22 billion, this will be another defining transaction which will receive global attention. The Indian startup promise will seem more real. For that, I would like to compliment Ritesh and the Oyo stakeholders. Take a bow!

When a young founder in his twenties buys back $1.5 billion worth of stock from his early investors (30-50x return) and pumps in another $500 million into the company at a $10 billion valuation (2x the last round), many questions are raised. They revolve around feasibility, who is really behind the deal and what it means for the larger ecosystem. Let me spend a few moments to address some of these questions.

1. Can Ritesh Really Borrow $2 Billion?

Well, the answer is technically yes. The lenders would have a 1.5x cover (just like all the mutual funds did) with $3 billion worth of shares against a $2 billion loan. These arrangements typically have a bullet repayment, so cash flow needed for interest payments is not an issue. In the real world, for unlisted stock, lenders demand far greater coverage than 1.5x but that can be dispensed with, if a fund raise at a higher valuation is imminent.

It is quite likely that the actual arrangement is a mix of debt and some backstop from SoftBank.
Masayoshi Son, chairman and CEO  of SoftBank Group, during the SoftBank World 2019 event in Tokyo, on July 18, 2019. (Photographer: Akio Kon/Bloomberg)
Masayoshi Son, chairman and CEO of SoftBank Group, during the SoftBank World 2019 event in Tokyo, on July 18, 2019. (Photographer: Akio Kon/Bloomberg)

2. Is Oyo Really Worth $10 Billion?

This is the heart of the matter. Valuation is a subjective construct and fast-growing companies are devilishly hard to value. Beyond a point, value is what someone is willing to pay. Ritesh and the banks are clearly taking the view that it is worth even more. The company would have shared its roadmap and future plans which could have given them comfort. The promise of fees from future fund raises and eventual listing could have also helped sway recalcitrant minds.

3. Why Are Sequoia And Lightspeed Selling If The Future Is So Bright?

The answer is complex and could also have to do with the reality that every Indian venture capitalist is constantly asked by their investors – where are the exits?

Roughly $40 billion has been invested in Indian startups over the last decade. There have been $23 billion of exits.

Of this $23 billion, Flipkart alone accounted for $16 billion or more than two-thirds. Investors expect at least $120 billion (3x over the next 7-8 years) for the asset class to be worth it and hence, there is a need to sell at opportune moments. Don’t forget, the VCs continue to remain invested, so this isn’t a run for the hills, kind of move.

4. Is It A Wise Move For Ritesh To Go All-In?

While it is thrilling to watch, it does seem a bit much to put your sole founder under so much pressure. That said, this is an individual choice and combined with some backstop, it is definitely possible. The argument that Ritesh has nothing to lose strikes me as odd. It is not such a binary outcome that either Oyo is worth nothing or it is worth $20 billion.

In the real world, all outcomes are possible, so putting your entire stake on the line is non-trivial.

My submission is what makes such entrepreneurs great is their risk taking ability. They live and sometimes die by the sword!

Ritesh Agarwal poses for a photograph at an Oyo Townhouse in Bengaluru. (Photographer: Samyukta Lakshmi/Bloomberg)
Ritesh Agarwal poses for a photograph at an Oyo Townhouse in Bengaluru. (Photographer: Samyukta Lakshmi/Bloomberg)

5. What about SoftBank?

Is this just a roundabout way for them to buy more of the company? Tempting to think of the transaction in that way, as Softbank has a 49.99 percent limit. If there is a backstop, then the consequent economics will give them some upside, so this could be partially correct. This question will be conclusively answered only when the next round happens.

If the round is led by an external investor and there is a valuation upside, then clearly this was not just for them.

Else, the suspicion will linger. They are the ones who are truly ‘all-in’ in Oyo, they need the business to do well and have a bumper IPO. Perhaps, super incentivising the founder can be seen in that light.

Conspiracy theories aside, this deal is at heart a highly leveraged bet on the business of Oyo by a visionary founder who wants more control and upside. He is willing to put whatever he has at stake to get there. Skeptics may question the valuation and/or mechanics, but the founder and the largest shareholder are putting their money where their mouth is.

Leverage is a bad word in today’s milieu, but the truth is that just as it can kill, it can also thrill! For every Essar Steel there is an ArcelorMittal; fortunes have been made and fortunes have been lost on leverage. Time will tell which camp this bet falls in, but this is definitely a step forward for the ecosystem.

Postscript: Readers may not know that ‘YOYO’ in millennial slang stands for ‘You are On Your Own’!

References

* One can’t directly compare the listed and unlisted scenario as in the listed case, sellers can out the stock under pressure and start a vicious circle. That is tougher to do in private situations especially when the other shareholders are supportive as they have a lot to lose too!

** On a lighter note, this puts a new spin on all those agreements where on Page 56, lawyers would write that investors could force the founders to buy them back at ‘x percent IRR’. There would be nervous laughter from the founders and everyone would move on!

Sarbvir Singh is Managing Partner at WaterBridgeVentures, an early stage, technology-focused venture fund.

The views expressed here are those of the author and do not necessarily represent the views of Bloomberg Quint or its editorial team.