SoftBank & OYO – The gathering storm

OYO is another blackeye in waiting.

• SoftBank’s flagging reputation may be about to take another hit as another of its flagship investments has hit difficulties and is struggling to overcome them.
• This is a knock-on effect from the WeWork disaster which has pushed SoftBank to demand that its portfolio companies start making money almost immediately which is causing a lot of problems.
• This time it is OYO that is in the frame.
• OYO is an Indian budget hotel chain that likens itself to the Uber or Ola of hotels.
• In practice, it is a marketplace where small hotels can list their rooms under the OYO brand giving those looking for a place to stay a single place to look.
• OYO also operates some of its own properties such as the OYO Hotel in Las Vegas which until recently was known as Hooters Hotel and has been rebranded by draping canvas over the old signs.
• In exactly the same way as ride hailing, bike sharing and food delivery, the company has spent large sums of money to attract hotels and guests to the site resulting in high growth but heavy losses at the same time.
• This is all fine while growth remains substantial and the company has the confidence of the investors, but if that confidence is lost, a vicious circle can ensue potentially resulting in the collapse of the company.
• WeWork went from a $47bn valuation to being virtually bankrupt and not able to pay severance to the staff that it had to lay off in a matter of weeks last year (see here).
• The situation with OYO is not as extreme as this but now that the mask has slipped, difficult questions are being asked about both its financial soundness and its business practices (see here).
• The sale by Lightspeed Ventures and Sequoia of 50% of their stake ($1.5bn) valuing the company at $10bn to SoftBank and the founder was a worrying sign in July 2019.
• SoftBank now owns virtually 50% of the company with the founder on around 30%.
• In 2015, SoftBank was happy for the company to grow as quickly as possible but now, following the WeWork disaster, it is pressing OYO to become profitable as quickly as possible.
• This has forced heavy layoffs and cost cuts that are almost certain to ensure that quality of stays for guests takes a hit.
• This will make it very difficult for OYO to make the 7/10 average guest rating that it now aspires to reach (see here) and may cause guests and hotels to stop using the service.
• The focus is now on profitability which will inevitably mean that growth collapses as it was the too-good-to-be-true deals offered to hotel owners and guests that kept the growth going.
• It turns out that they were too good to be true and they will now have to be stopped.
• A sustainable business will be one that is just about profitable and grows at a much slower rate which will inevitably attract a far lower valuation the next time it has to go back to the market for money.
• There is another write down coming.