Why SoftBank-backed Oyo is going for a ‘down round’ IPO

Arc Notes

• The hotel aggregator makes a second attempt to go public, trimming its issue size from $1.2 billion in 2021 to $400 million. It may list at about half its last private-market valuation of $10 billion.
• Oyo has pre-filed the offer documents confidentially with Sebi. This gives it flexibility in terms of total capital raise and final valuation.
• In the confidential method, details such as Oyo’s latest financials will remain private until it submits the final draft prospectus.
• The Arc understands that founder Ritesh Agarwal is pitching to investors that Oyo had a revenue run of $1 billion and an ‘adjusted EBITDA’ margin of 3-4% in FY23.
• Revenues for the period are pegged at $750 million (Rs 6,200 crore), 55% higher than the $482 million (Rs 3,961 crore) it earned in FY21.

Arc Analysis?

Hospitality startup Oyo is trying its luck with markets regulator Sebi again, confidentially filing for an initial public offering of $400 million.

It had first attempted listing on the stock exchanges in 2021 and got its fingers burnt as Sebi posed a raft of queries.

This time, it has taken the confidential ‘pre-filing’ route, which gives it some control and room to manoeuvre.

Oyo can bump up or lower the issue size by 50%, which means it could raise between $200 million and $600 million. “This will also give them an 18-month window (to launch the issue) compared to 12 months in the traditional IPO mode,” according to a person briefed on the matter.?

Oyo can also abandon the IPO plans without publicly disclosing sensitive business details if the market trends or Sebi’s remarks on the offer documents are not to its liking. Oyo will be hoping it doesn’t come to that.?

The company, though, will have to dilute a minimum of 10% in the issue as required by Sebi’s rules, and this size indicates a maximum public valuation of $6 billion. It was valued at $10 billion in the private market in 2019, having raised $4 billion-plus since 2015, including a term loan B and secondary.

The way things stand, Oyo’s stock debut will mean a significant haircut, or financial hit, for its big-name backers. SoftBank, for instance, has invested $2 billion and holds a stake of about 45%. Oyo founder and CEO Ritesh Agarwal, too, will take damage as he had borrowed $2.1 billion to up his stake in the company at a $10-billion valuation in 2019.

Recently, he told employees that the company was expecting to achieve an “adjusted EBITDA” profit of Rs 800 crore ($97 million) in the financial year ending March 2024. Moreover, it has Rs 2,700 crore ($329 million) of cash in the bank, The Economic Times reported. (EBTIDA is earnings before interest, taxes, depreciation and amortisation.)

These numbers suggest Oyo has no immediate worries or an emergency, though the scale of its operations has slimmed down since it had revenues of $1.6 billion in March 2020.

So, why is it opting for an IPO at a reduced valuation? Some other unicorns, such as Mamaearth, deferred their issues over the prospect of a less-than-ideal valuation. Oyo, it seems, doesn’t want to drag this process out further.

“It’s not like they (Oyo) need to raise money immediately, but they will require it in the next 18 months,” said a person familiar with the matter.

The Dreaded ‘D’?

In 2021, the company took a $660-million term loan B, followed by more debt. It will now have to make interest payments of about $70 million (Rs 575 crore) every year. This will account for three-quarters of the $97-million (Rs 800 crore) “adjusted EBITDA” it hopes to log next year.?

The hotel aggregator pulls in nearly equal amounts of revenues from India and Southeast Asia. Its acquisition of vacation-rental player Leisure Group in Europe has lifted its struggling business following the pandemic and now accounts for an oversized 50% of its EBITDA, according to bankers. The deal was struck for $415 million in 2019.

While travel has rebounded after the Covid-19 shock, there are complications. “It remains to be seen what impact the recession in the US will have on the business in Europe,” said a banker.

The difference between Oyo and other startups trumpeting profitability using “adjusted EBITDA” is the level of debt with annual interest obligations. The best way to measure its profitability is to factor in the debt and interest payments.

Four years ago, Agarwal raised debt to increase his equity in Oyo in an unconventional move. Now, he is pushing Oyo to raise equity through a public offering to pay off the company’s debt.?

(Written by Madhav Chanchani)