Ritesh Agarwal’s OYO Share Buyback At High Valuation Could Backfire As Revenue Crashes

Last year, OYO founder Ritesh Agarwal had taken up bank collaterals to buy back shares in his company and increase his stake in a $2 Bn funding round. This round valued the company at $10 Bn and Agarwal’s investment was a bank borrowing and SoftBank chief Masayoshi Son personally guaranteed the loans from financial institutions.

“In three years, it will become clear if this was good or bad,” Agarwal told Financial Times. This transaction is also in limelight because of the probable loss it can cause to SoftBank and its chief Masayoshi Son.

Analysts have said that SoftBank booked profits on OYO’s rising valuation and may now be forced to take losses on the investment as the company will see a loss in valuation after the current coronavirus-led slowdown for the travel and hospitality industry.

OYO’s High Valuation Under Pressure

Further, Mizuho and Nomura, the Japanese financial institutions backing Agarwal’s buyback deal may ask for more collateral if OYO’s valuation drops, and both Son and Agarwal could face personal losses, even having to pay out of pocket to offset the drop in valuation.

Interestingly enough, Agarwal said that he came up with the valuation of $10 Bn by comparing OYO to Netflix, Uber and Peloton. “We had revenues of between $2.7 and $2.9 Bn so that valuation checks out,” he said. With a fall in revenue expected for at least two quarters, the valuation of the company is expected to go down as well.

It is being reported that the case may be complicated as Masayoshi Son’s personal financial interests, as a guarantor of Agarwal’s loans, would be somewhat different from SoftBank’s company goals. This gains significance further because of the WeWork turmoil that SoftBank went through and because of which, the company had to bail out WeWork. Since then, Son has vowed that he won’t be bailing out any more startups. He was also regretful of some of the decisions he had made through the SoftBank Vision Fund.

As for WeWork, Agarwal said that it was WeWork that changed the ‘atmosphere’. “There was before WeWork and then there was after WeWork. Pre WeWork, all our decisions were iconic. Later it seemed easy to blame us for all we decided,” Agarwal said.

WeWork founder Adam Neumann and OYO’s Agarwal have been time and again compared for the rapid growth and scaling up of both businesses and allegations of over-priced valuations. Multiple experts have argued that OYO’s business model resembles WeWork’s as a tech-inflected real estate business that has expanded far beyond its initial concept.

OYO Expected To Have Massive Losses

Most recently, OYO has sent thousands of employees to go on leave or furloughs for a period of up to three months as the company plans to dodge coronavirus’ impact on the revenue and occupancy of its hotel rooms. The company is expected to see far heavier losses than it reported last quarter.

Since the outbreak, OYO’s occupancy rate and revenues have dropped by more than 50 to 60% and the company’s balance sheet has come under severe stress. As a result, the company is looking at every way possible to reduce the costs. For instance, OYO has put a halt on all the capital expenditure (CapEx) activities. Agarwal said that all the non-essential travel has also been put on hold for the moment.

He also brought the fact the impact has come just after OYO did a sizeable restructuring of the company in January. Due to which, the company plans to do no or negligible layoffs for cost restructuring across the world. However, the company has reportedly laid off around 360 employees in the US recently.

Agarwal has also forgone his salary for the year and senior leadership have been asked to take a 25% from the salary.

Indeed, the hospitality sector is one of the hardest impacted industry in the wake of the coronavirus outbreak. Besides, OYO other Indian startups in the travel and tourism spaces have been severely impacted including Yatra, MakeMyTrip, ixigo, Treebo among others.

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