OYO in talks with SoftBank for funding, valuation may touch $4 billion

It's turning out to be a big year for hospitality company OYO. In March it notched up its first major acquisition, two months later it expanded its global footprint by moving into China and is now close to turning profitable. But there's more. The company reportedly also has its eye on the coveted unicorn club.

According to The Economic Times, OYO is in advanced talks to raise up to $1 billion in a deal that could value it at over $4 billion - in the same league as Ola, India's largest taxi-hailing service. Citing people in the know, the report said that the Gurgaon-based startup is in talks with two consortiums, a combine of SoftBank Vision Fund and co-working giant We-Work, and a set of US-based strategic investors in the travel space. But it is yet to finalise things.

"OYO has got multiple term-sheets and is expected to finalise the deal by the end of this month," said a source, adding, "Venture capital investors Sequoia Capital and Lightspeed are also participating in the round in a meaningful way." Though the company is yet to decide on the quantum of the fund raise, the sources pegged it at between $500 million and $1 billion.

Depending on this, they added that the company could be valued between $4.5 billion and $5 billion. In its previous round last September, when OYO had raised about $260 million from SoftBank and other investors, it had been valued at about $850 million. Founded by 24-year-old college dropout Ritesh Agarwal in 2013, OYO has raised about $450 million so far.

The buzz last month was that the company was in talks with Chinese technology giant Tencent to raise up to $500 million, but according to the daily the talks did not progress.

The funds raised in the next round will reportedly be used to deepen its presence in China as well as the other countries where it has set up operations, such as Malaysia, Nepal, Indonesia and UAE.

"If Oyo has to make an impact in China, they have to do it in a big way. It's a large market and they have to put a lot of feet on the ground, understand the local ways of doing business, understand the consumer, and build a brand. That requires a lot of money and [OYO] will have to raise a substantial sum to be successful," Harish HV, a consultant and until recently a partner at Grant Thornton India told the daily.

Last September, OYO had signed a five-year Memorandum of Understanding ("MoU") with the China Lodging Group to facilitate and strengthen collaboration in order to build a global market leading hospitality business. Then, earlier this month, the company announced that it already has 50,000 rooms across 50 cities in China.

And SoftBank's CEO Masayoshi Son can't stop raving about its growth. In an investor presentation on August 6, Son compared OYO's growth to Marriott, the world's biggest hotel chains. "By the end of the year, I would say 150,000 more rooms or maybe 200,000 rooms, which will be 10x more than Taj group's rooms will be OYO's," said Son, adding "If you look at [OYO's] monthly number, 25,000 rooms were created every month... how many net room ads were created by Marriott monthly? It's 8,000. Hilton, the second biggest, 7000, and Intercontinental, the third biggest hotel chain in the world - they grew number of hotels in last three months - 2,000".

With a 45% stake, Japanese behemoth is already OYO's largest shareholder. "If SoftBank leads the round then they will get close to a majority stake but the management team led by Agarwal will continue to run the operations as they have executed well," added a source.

The other stakeholders include Lightspeed Venture Partners (15%) and Sequoia Capital India (11%). The founder holds a 11-12% stake.

In India, the company currently boasts 100,000 keys across 230 cities and is racing towards profitability. Last December, the company had claimed that it had narrowed its losses by 27% to Rs 363.7 crore in 2016-17, mainly on account of a high degree of operating leverage in the business model. Industry sources also point out that OYO has hiked up the commission it charges hotels from 11-12% last year to over 20%.

The report added that between January and June, OYO clocked 17 million booked rooms nights domestically. Its switch to the pure-play franchise business - it had started out as an online hotel aggregator has helped improve customer experience.

Edited By Sushmita Choudhury Agarwal