Shares buybacks are not uncommon. They are usually done to provide liquidity to employees holding ESOPs or for a company’s promoters to rack up their shareholding when the firm has excess cash or the stock price is low (in case of a listed entity).
In the start-up world, it is unprecedented for a founder to buy back shares from investors and this is what makes the case of Oyo Hotels & Homes so interesting.
The company’s founder, Ritesh Agarwal, has proposed to buy back shares worth $1.5 billion from early investors Sequoia Capital and Lightspeed and also infuse another $500 million in the company. Agarwal, who will see his shareholding go up to about 30 per cent from 10 per cent currently, is pledging his shares to finance the share buyback.
Oyo had said in July that Agarwal would raise debt through newly-incorporated Cayman Island entity RA Hospitality Holdings, which will be financed by Japanese banks Nomura and Mizuho. Interestingly, Oyo’s largest shareholder Softbank is also domiciled in Japan.
The buyback plan has been approved by Indian anti-trust watchdog Competition Commission of India, The Economic Times reported on Tuesday.
What this means for Oyo
A higher stake in the company by founder Agarwal will enable him to exercise stronger control over it.
Currently, Oyo is in a phase of aggressive international expansion. Last year, it entered China as OYO Jiudian and in 18 months had on-boarded 10,000 hotels. Early this year, it launched in Japan through a partnership with Softbank, and in Europe, where it acquired Amsterdam-based holiday rental company Leisure, besides announcing a plan to invest $330 million to grow business in the continent. A similar investment is committed to the US market.
What this means for shareholders
Lightspeed, which invested in the company in 2014, is said to be selling all of its 13.4 per cent holding in Oyo for estimated $1 billion, according to The Economic Times. This translates to a 50x return over an overall investment of $20 million.
Sequoia is also taking a part-exit through Agarwal’s share buyback. It is expected to gain $500 million from the deal over an investment of $27 million across rounds.
While the proposed transaction is a smash-hit liquidation event for the investors, their exits at this point have raised eyebrows, given Oyo’s recent announcement of a planned IPO in 2021-20. The company expects an eye-popping valuation of $18 billion at the IPO.
What this means for Softbank
Truth be told, Oyo is one the most important bets of Softbank in India. Softbank has invested over $1 billion in the company since its first investment in 2016; it shareholding now rests 46-48 per cent.
Softbank, which is investing through its Vision Fund, needs steady rise in the valuation of its portfolio, which it shows as profits to its own shareholders.
However, as per a clause in the share agreement between Softbank and Oyo, the former cannot increase shareholding over 49.9 per cent without the approval from the company’s founder and a few major shareholders such as Sequoia and Lightspeed.
Even though Softbank does not want to become a majority shareholder, it needs to offer some exit to existing shareholders without infusing more money itself. The Japanese investor is enabling that through a complicated share buyback by the the company’s founder, a transaction where Softbank is acting as silent guarantor behind the curtains, according to an article in The Ken.