Ritesh Agarwal is currently the toast of India’s startup ecosystem. After having bought back shares worth $2 billion into his startup Oyo Rooms, he now owns 30% of the company he’d founded, which means he gets a potentially bigger payday when Oyo does go public. Also, the deal has raised Oyo’s valuation to an eye-popping $10 billion, which puts it in joint first place with Paytm in the list of India’s most valuable startups. But even as Agarwal is being feted by India’s startup community and media alike, not everyone is as impressed.
Ritesh Agarwal’s mega share buyback has raised eyebrows among India’s investing community. “When you borrow $2 billion to buy your own shares, with those very shares as collateral. And you don’t have much else. The problem isn’t yours. It’s of the lender. It’s All right to celebrate this but this kind of leverage is just insane…and we’ve seen it end badly before,” tweeted Deepak Shenoy, founder of investment firm Capital Mind.
When u borrow $2 billion to buy your own shares, with those very shares as collateral. And you don't have much else. The problem isn't yours. It's of the lender.
It's All right to celebrate this but this kind of leverage is just insane…and we've seen it end badly before.
— Deepak Shenoy (@deepakshenoy) July 21, 2019
He then went on to cite examples of when share buybacks hadn’t gone quite as well. “Even Ken Lay of Enron borrowed to buy shares. When Enron was failing, lenders were forcing share sales to recover debt,” he said. “In India, Zee promoters pledge the good company’s shares to borrow to do heaven-knows-what. That hasn’t turned out well – to the point where, in the next few months, the promoter might lose the company,” he added.
With Oyo, he said that the real winners were Venture Capital firms Lightspeed Venture Partners and Sequoia, which had earned roughly ~50x returns on their investments with the repurchase. “The celebrations are rightfully in the Lightspeed and Sequoia camps. (Unless there’s a side deal we don’t know about). But the other camps – Nomura or Ritesh Agarwal – have more to worry than to enjoy; but the story is perhaps even more murky on the inside,” he added.
Some other stock market watchers were even more blunt — fund manager Samir Arora hinted he’d like to short companies that had lent to Oyo. “On this OYO transaction: confusing. Ritesh owns 10% increasing to 30% via debt. So he owns USD 1B worth of unlisted single co shares & someone is loaning him $2 billion against that to increase stake,” he tweeted. “My Q: Who is the lender, is its stock listed in India and does it have listed futures?” he said.
On this OYO transaction: confusing.
Ritesh owns 10% increasing to 30% via debt. So he owns USD 1B worth of unlisted single co shares & someone is loaning him 2B against that to increase stake.
My Q: Who is the lender, is its stock listed in India and does it hv listed futures?
— Samir Arora (@Iamsamirarora) July 20, 2019
Others wondered the lender would take a risk of this nature.
So loss making Oyo Hotels founder will borrow from banks to fund his mega buy back to help early investors partly exit the Co at eye popping profits. through a Cayman island rgd co? And what if the IPO becomes a dud, from where do the banks recover their capital? https://t.co/5U0JKt7kMV
— swaraj (@swarajsb) July 20, 2019
There currently isn’t enough publicly available information around the deal, or the terms at which the lenders have pitched in with the $2 billion. There also isn’t clarity on why Agarwal would choose the offshore financial haven of Cayman Islands to register his company RA Hospitality, through which the buyback is being structured. Only time will tell how the deal pans out, but for now, it sure seems to have its shares of both believers and skeptics.