The parallels between hotel chain unicorn Oyo and office-sharing unicorn WeWork -- whose value plunged from $47 billion to "a pretty high probability of being a zero," according to a veteran investor after seeing its IPO filing -- point to their common DNA and raise similar questions. SoftBank Group, directly and through its Vision Fund, is heavily invested in both.
Three symptoms stand out: first, a questionable business model; second, Oyo's numbers, and in particular its shockingly small revenue; and third, a heady valuation propped up by a financial maneuver previously used by SoftBank family members.
Oyo's original business model -- aggregating and branding small budget hotels in a highly fragmented Indian market -- made sense. Founder Ritesh Agarwal saw an opportunity to unify a hodgepodge of low-end hotels into a nationwide network with a common reservation platform, together with branding and minimum quality standards that appealed to Indian travelers wanting to lower the odds of an unappealing room.
The first wrong turn that Oyo's business model took was the same as WeWork's. It morphed from an asset-light virtual reservation and branding platform into one invested in the bricks and mortar of its hotel-owner clients. Oyo began investing its own money in physical improvements to the hotels in its network to ensure that they met uniform minimum standards.
Going further, to attract hotel owners to join the Oyo network, it began leasing rooms from them -- promising in effect to pay the owner whether or not the rooms were occupied.
Assuming real estate and occupancy risk was precisely what led to WeWork's downfall. WeWork signed hundreds of long-term leases with office building owners, betting that it would be able to sublease the space to enough short-term users at a premium to make a profit.
More ominously, recent forays by Oyo outside of India -- bankrolled by SoftBank and its affiliated Vision Fund's aggregate investment of $2.5 billion -- show that the original business model has been abandoned altogether in favor of what appears to be free-form real estate investing.
In recent months Oyo has spent SoftBank's capital by buying @Leisure Group, an Amsterdam-based vacation rental company, for an estimated 369.5 million euros ($407 million); Hooters Casino in Las Vegas for $135 million; and 80% stake in Japanese rental apartment operator MDI which reportedly cost over $100 million.
Meanwhile, the launch of Oyo-branded hotels in China and Japan has fallen far short of target, with reports of mass terminations of local employees and general turmoil. These are troubling symptoms of a company and business model that have lost their way, perhaps in part as a result of not knowing what to do with the piles of money that have been thrown at it.
Next, the revenue numbers reported by Oyo are surprisingly small for a company said to be worth $10 billion. For its core India business for the financial year 2018, Oyo reported revenues of just $61 million and a loss of $53 million. This compares to annual revenue of $21 billion and net income of $1.9 billion for established hotel giant Marriott.
The modest size of the loss on the core Indian business, compared to the $1.9 billion annual net operating loss of WeWork in 2018, perhaps gives relative comfort.
What should be of greater concern are the uncertain prospects for the random accumulation of real estate investments outside India that have no roots in the company's original business model or expertise. This is similar to WeWork's investments in noncore businesses -- which it is now selling off -- such as a digital marketing platform and a wave-pool business.
Finally, the way Oyo reached its $10 billion enterprise valuation -- compared to $5 billion just a year ago -- thanks to Agarwal's recent transactions with the company echoes a financial maneuver SoftBank founder and CEO Masayoshi Son has previously used to support a company's nominal value.
The maneuver involves borrowing money, backed by pledged shares, that is recycled back into the company at an elevated valuation.
Son himself has pledged 38% of his SoftBank Group shares to banks to borrow money that he has recycled back into SoftBank, which helps to support a high stock price. Similarly, SoftBank Group has encouraged its senior employees to borrow $5 billion from the company to be recycled to purchase company shares.
In the latest iteration, Agarwal borrowed $2 billion from banks including Mizuho Financial Group and Nomura Holdings, backed by his Oyo shares. He then recycled the borrowed money in the form of $700 million of fresh equity and bought back $1.3 billion of shares from venture capital shareholders at an enterprise valuation of $10 billion.
Son and his team borrowing money against pledged shares to buy more shares at ethereal valuations may one day, if all goes well, be viewed as strokes of investment daring and genius. In the current context, however, it looks more like an act of desperation to keep additional leaks from springing in the dam.
SoftBank Group's recent $6.4 billion third-quarter loss from massive writedowns of its investment in WeWork and other companies dramatizes the extent to which it now existentially depends on paper valuations and gains in companies like Oyo whose real market value can only be guessed.
These efforts may postpone the day of reckoning, but real transparency and price discovery in the market are SoftBank Group's only path to recovery.
Stephen Givens is a corporate lawyer based in Tokyo.