In today’s newsletter, we cover Ritesh Agarwal’s extravagant ambitions with OYO and the 5G spectrum problem
A tale of bravado, or is it?
A couple of days back Ritesh Agarwal, the founder of OYO Rooms, finally received approval from the Competition Commission of India (the guys that ensure everybody in the corporate sector play fair) to go ahead with his plans to buy back shares worth $1.5 Billion.
Wow!!! So here’s what’s happening.
- The actual headline—Straightforward .
So Ritesh Agarwal is on the cusp of buying back shares from other shareholders in the company. Once the deal is completed, his shareholding will go from from a measly ~10% to a solid ~30%.
He will spend $1.5 Billion to buy back these shares and another $500 Million to fund OYO’s expansion.
Great stuff. Onto the second point
2. The semantics of the deal — slightly complicated.
The deal will go through, courtesy of a $2 Billion loan from Japanese banks, Mizuho and Nomura.
So, Ritesh Agarwal borrows money to buy back shares from existing shareholders including Lightspeed and Sequoia offering them a sweet exit in the process. Lightspeed alone is expected to be walking away with about 50 times as much money as the original investment.
3. The purpose of the deal—very very complicated.
Why would Ritesh Agarwal want to take on himself such a huge debt burden?
Granted, the company is currently valued at $10 Billion and it’s possible OYO might actually go public with a gargantuan $18 Billion valuation as they’ve already stated. But borrowing money to the tune of $2 Billion in the hope that the company will be worth all this money in a few years time. It’s either the greatest coup by an Indian founder or the greatest blunder ever committed in the Indian start-up space.
Remember, the $10 Billion valuation isn't based on the sagely wisdom of a large group of people like we have in stock markets. No. This number is based on what a small group of people think OYO is worth — based on the last round of funding. It’s possible some of them simply want OYO to be worth $10 Billion. Or it could be that these people have a lot riding on this thing.
No matter how you look at it, everybody wants OYO to be worth a lot more.
But what if it can’t meet investor expectations when eventually it decides to go public? Bear in mind, Ritesh Agarwal has to make an interest payment on the loan. Even if you were to consider a bare minimum interest rate of 12%, you’re looking at paying ~$800 million as interest in a span of 3 years. And where does he get the money to make the payment?
Well, Ritesh is obviously a rich man. But most of this wealth is still on paper. Until he can sell some of his stake in OYO for actual cash there is no money here.
The only way he comes good on this payment is if OYO does in fact go public (IPO). And when that day comes, let’s hope that OYO isn’t blindsided by what the larger public thinks about the company.
The problem with Spectrum Allocation
The 5G wave is upon us. Unfortunately, we seem to have a problem- Spectrum Allocation. Jeez! Are we doing this again?
Think of Spectrum allocation as the government's way of auctioning radio frequencies (5G airwaves for example). Who gets to use how much is incumbent on who's willing to pay the most. However the government decides on the reserve price- a minimum amount below which you simply can't bid. And they decide on this price by taking into account all the money these telecom providers are likely to make out of 5G once the service is live.
If the government thinks the likes of Reliance and Airtel are going to make a killing out of 5G it'll probably ensure the Reserve price stays way up.
And here in lies the problem. The telecom guys aren't going for it. Their contention is rather simple. We have too much debt. People pay too little money for our services. You have to stop fleecing us.
The government isn't budging either. Their position is very clear. India's market opportunity is too huge for us to sell this at a pittance. So nothing doing.
And we have a stalemate. Hopefully we don't end up with another 5G spectrum debacle this time around.
Anyway, that's it from us. We will see you tomorrow. Cheers :)
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