Oyo's $2 Billion Guarantee From Masayoshi Son At Risk

Ironically, Ritesh Agarwal backed by his SoftBank Group Corp was publically declared by Masayoshi Son as one of their star entrepreneurs, just nine months back. At that point of time, the Japanese billionaire had boasted everyone that Agarwal’s, dream venture of Oyo Hotels & Homes would inevitably overtake the biggest global hotel chains within a few years of its founding. “It’s unimaginable,” Son had said on stage at SoftBank World in Tokyo. “At 25, he’s going to be world’s biggest hotel king,” he added.

Oyo has frozen its global operations today and has decided to send its thousands of employees on furlough as the company struggles to survive the pandemic. With a sudden halt of travel, the hotel rooms are left empty raising their losses. The situation of Oyo could prove to be quite messy in times to come. Since Agarwal, had earlier, in an unprecedented move had borrowed $2 billion to buy shares of his own company, as their valuation was rising, Son had personally guaranteed loans from various financial organizations including Mizuho Financial Group Inc. However now, the two men can face personal losses, presuming that the banks ask for more collateral if Oyo’s valuation drops further.

“Agarwal could be in trouble soon if he faces a margin call,” said Justin Tang, Head of Asian Research at United First Partners. “He might need to sell shares at a massive discount.” Son had vowed not to bail out any more startups after WeWork, moreover looming concerns are weighing on SoftBank’s share price. Son’s personal financial interests being a guarantor of Agarwal’s loans have landed into complex circumstances. The Japanese company may get involved if SoftBank determines to rescue Oyo.
 
“An indefinite furlough must mean Oyo’s earnings and cash flow have deteriorated extremely,” said Daisuke Seki, Chief Executive Officer at IB Research & Consulting Inc. of Japan. The employees were told by Aggarwal in a video last week, that furloughs would not only keep their jobs safe it would also support the business in the long term. Oyo currently has little over $1 billion of cash in the bank and is also trying to explore further options to remain in the market for a minimum period of at least the next 36 months.

“Oyo’s problem is that they’re not just an aggregator; they have minimum guarantees to pay -- or they have to tell owners they cannot make those payments,” said Satish Meena, senior forecast analyst at Forrester Research Inc. “The pandemic is coming in waves and that makes it even more difficult for them.”

For Son, dealing with maybe another blow to its reputation as a startup investor. Earlier too Son staked his reputation on his startup bets with Vision Fund, wherein every setback was magnified by billions.

Early on, Vision Fund raised steadily in value, of its startup holdings. Son highlighted it as a piece of evidence for fortunes to pour in, however, it turned out that the profits showed up only on paper. Apparently, Oyo was a contributor to those profits. The Vision Fund had initially invested $250 million into the said Indian firm in 2017 which led to a $1 billion funding in the year 2018, soaring the Indian company’s valuation to $5 billion. Sequoia India and Airbnb Inc. had also invested in Oyo.

Now, the Vision Fund has started to report losses starting with WeWork fiasco, which contributed to investors of SoftBank getting feelers of negative sentiment. The fund has so far in the last two quarters lost approximately, $11 billion. Meena said, “They will have to revalue Oyo after such a crisis.”