No Deal: OYO Zo Rooms Acquisition Deal Never Happened, Confirms OYO

Finally, after more than a year of speculation, some clarity has emerged on the acquisition deal between OYO and ZO Rooms. In an official statement, OYO has confirmed that it is no longer involved in talks with ZO Rooms for a potential acquisition.

The official statement from OYO said,

In late-2015, OYO explored a potential acquisition of Zo Rooms. The non-binding term sheet for this deal already stands terminated in September 2016. Following this, we tried to identify potential value in their business but could not reach an outcome. We can now confirm that OYO has ended all discussions on the matter.

Inc42 contacted Zo Rooms on the matter but the company declined from commenting on the same.

The OYO Zo Rooms Acquisition Dance Till Now

Zostel Hospitality Private Limited, Zo Room’s parent company, was founded in August 2013 by Dharamveer Chouhan, Akhil Malik, Paavan Nanda, Tarun Tiwari, Chetan Singh Chauhan, Abhishek Bhutra and Siddharth Janghu with an initial corpus of $30K (INR 20 Lakh). The startup has two brands i.e. ZO Rooms and Zostel.

It was in December 2014, when Zostel entered the budget hotel space with Zo Rooms, a chain of premium budget hotels which grew to 750+ properties across 51 cities in India within 10 months of its launch.

The rumours that OYO was looking to acquire Zo Rooms first surfaced in December 2015. It was reported that the budget aggregator OYO was to acquire the smaller rival ZO Rooms in an all-stock deal. As per an ET report, the deal, an asset sale, had been structured in a way that Zo Rooms’ seven founders and investors including Tiger Global would get a combined 7% stake of OYO.  The report also stated that – Zo’s founding team would exit the company after the transition is complete.

Reports also stated that Zo’s existing investors were not keen on extending investments with Zo Rooms which has led the company to seek more avenues. As per sources, the startup had claimed that about 40% of its employees were being retained in the deal while it would help placing rest of the employees in other startups and companies through its network.

Zo Rooms had roughly raised $35 Mn from existing investors, Tiger Global Management and Orios Venture Partners in July 2015. Prior to that, it had raised $1 Mn from Sol Primero. At that time, Zo Rooms was also reportedly in talks with a few investors for raising up to $200 Mn in a new round but the deal did not materialise.

The stories around hiccups in the deal started around the same time as the deal was announced. According to a source close to the development, Oyo had reached out to Tiger Global backed Zo Rooms with a buyout offer in a bid to strengthen its share in the budget hotel category. However, it seemed that OYO dropped plans of acquiring Zo Rooms, which had been struggling to raise fresh funds.

In February 2016, there were also reported that Zo Room’s website has been pulled down, hinting at the proposed merger. The two parties also confirmed stating that they were almost through with the deal, and there would be an official announcement soon. Interestingly OYO’s investor SoftBank had also made a disclosure in its earnings report about the OYO and Zo deal and had confirmed the acquisition even though the deal was still in process and papers had not been signed yet.

However, more obstructions followed in April 2016 from OYO’s early investor VentureNursery. As per sources close to the development, VentureNursery was demanding the access to information that large investors typically receive from a company and the right to exit from the combined entity at a predetermined valuation, which was quoted to be $700 Mn.

Post these reports, there had been a lull of sorts on the proposed acquisition. Now with OYO’s statement, it becomes clear that as the non-binding term sheet expired in September 2016 without reaching an outcome, the much spoken about consolidation deal between OYO and Zo Rooms never ever came to fruition. The status of Zo Rooms post the failure of the acquisition remains a question. We will be updating the story once more details are received.

 However going through their LinkedIn profiles, we found that Dharamveer Chouhan’s profile says he is still a CEO at Zo Rooms; similarly Akhil Malik, Abhishek Bhutra, Chetan Singh Chauhan, and Tarun Tiwari are still Co-founders at Zo. However Paavan Nanda is currently listed as a co-founder at WinZo Games since November 2016 and Siddharth Janghu is listed as Head of Growth at Coins.ph.

It seems now that at the time of the announcement, OYO saw buying Zo as a means to consolidate its space in the budget hotel category as well as get the deep-pocketed New York-based investment fund Tiger Global on to its capitalization table. However, with Zo Rooms lagging behind OYO and waning interest from Tiger Capital, which decided to go slow on investing in smaller companies in its portfolio, it seemed the acquisition made little sense for SoftBank backed OYO. Just last month, OYO has raised  $250 Mn in a Series D funding round led by SoftBank. This was followed by OYO raising another $10 Mn from China Lodging Group Limited. The Gurugram-based company founded by Ritesh Agarwal in 2013 has now raised more than $550 Mn in funding till date and currently operates over 70,000 rooms in 230 cities in India, Malaysia, and Nepal.

Update 1: 27 October 2017, 3:30 PM

Post publishing the story, in response to Inc42’s queries, Zo Rooms sent the following statement: “As a matter of clarification, Zo states that OYO is resiling from the contractual terms after acquiring the entire ZO Rooms business by March 2016. This is not an act in good faith and Zo takes a very serious view of the matter and will take all steps to protect its interests and enforce its rights.”

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