Japan Connect: Mizuho, Nomura bankroll Agarwal’s $2 bn buyback to treble Oyo stake

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Japanese financial groups Mizuho and Nomura Holdings are the principal lenders that have financed Ritesh Agarwal’s buyback of shares in Oyo Hotels & Homes, said people aware of the development.

The two are part of a three member Japanese consortium that is funding Oyo founder Ritesh Agarwal to buy back his company’s shares worth $1.5 billion from early investors such as Sequoia Capital and Lightspeed Venture Partners – the biggest buyback undertaken by an Indian founder till date and also invest another $500 million into the company.

The identity of the third Japanese bank could not be independently verified.

The three-year loans that has already caused stir in banking and technology circles have been given against shares. They are expected to get repaid during the company’s proposed IPO in three years time. Agarwal is pledging his current 10% in Oyo to buy the next 20%-30% from Sequoia and Lightspeed by using this share backed debt financing from Nomura.

The money will be given to the Cayman Islands-registered SPV RA Hospitality Holdings (Cayman) that has been created for the buyback purpose. Subsequently his entire shareholding will be collateralised with the Japanese financial institution.

The financing deal also sets a new valuation benchmark for Oyo at $10 billion, giving a significant potential upside to existing investors like SoftBank. Oyo has raised $1.6 billion in equity funding till date, reaching a valuation of $5 billion at its last funding round. Other investors in the company include Airbnb, Grab Holdings and Didi Chuxing.

It is as yet unclear if RA Hospitality, a special purpose vehicle, also includes other entities apart from Agarwal. “RA Hospitality is being created primarily for this funding exercise to put in new money into the company,” said an official in the know. Any refinancing that Agarwal does is likely to be for secondaries only.

Both Nomura and Mizuho are also taking equity bets in Oyo. Nomura is investing $50 million in the company through a secondary sale of shares from SoftBank at a $10 billion valuation, as the Japanese financial group looks to take equity exposure on high growth, emerging companies in Asia Pacific, people aware of the development said. This will be the first time Nomura is investing from its own balance sheet in an Indian startup.

A SoftBank spokesperson declined to comment on ET’s questionnaire asking if it has provided any support directly or indirectly to enable financing to Agarwal through a put option or letter of comfort or any corporate or individual guarantees. However, sources close to SoftBank said no guarantees have been given by the firm. “The only security are the promoter shares and his personal guarantees,” said the official on condition of anonymity. “There is enough confidence that the value of the company will only go up substantially as it enters newer markets and continues on its growth path.”

A Nomura Asia spokesperson declined to comment. Mails to Mizuho remained unanswered till presstime Monday. Oyo did not comment. Text messages to Agarwal remained unanswered till the time of going to press.

Sources close to Nomura say the firm has taken a conscious decision to start taking equity bets “in scaled tech-companies with a clear route to capital market exits and where there are friendly (Japanese) investors.”

Instead of a fund structure, Nomura is looking a $500 million capital commitment from its propriety books for such investments across Asia Pacific. “This is similar to its earlier merchant banking activity though this will be within the bank,” said the official on condition of anonymity.

Nomura and SoftBank also share a deep business connect. Along with Goldman Sachs, Nomura Holdings Inc. was advising Masayoshi Son’s businesses on their deal to shift ownership of Yahoo Japan Corp. within the SoftBank empire. Japan’s biggest securities firm was also the lead underwriter for SoftBank Group’s 500 billion yen bond sale to Japanese individuals in April, and helped oversee the mobile unit’s initial public offering last December. Investment banking circles expect Nomura to also play a big “fee generating role” in the proposed IPO of Oyo or in any subsequent fund raising rounds.

“The landmark Oyo deal represents a negotiated outcome between the different share holders – a company that is enormously hungry for capital, an investor with a predilection for majority holding and large bets, a smart founder and smarter, more cautious traditional venture firms,” said Vivek Durai, co-founder, paper.vc, a business intelligence platform.

Industry peers believe this unique structure was created to comply with the by-laws of Oyo which restrict the Japanese investor from raising its stake in the Gurgaon-headquartered company to more than 49.9%. However, these terms too are expected to be revised soon. Article 21.6 of Oyo’s Articles of Association prohibit SoftBank from, directly or indirectly, acquiring more than 49.99% of the fully diluted share capital of the company, without the consent of Ritesh Agarwal, Greenoaks, Lightspeed and Sequoia Capital. The restrictions were included following a negotiated shareholder agreement arrived at during SoftBank’s Series D investment in Oyo.

“Other than becoming the dominant shareholder, buying an additional 20% would also mean consolidating Oyo’s financials into the books of Vision Fund,” said an investment banking sources on condition of anonymity.

Vision Fund is poised to raise its second fund, having already deployed $80 billion from its first fund. It reckons its investments had risen 20% compared with the purchase price by March, excluding two stakes it has already sold at a profit. The fund’s equity had generated a 45% internal rate of return (IRR) so far, more than twice the average performance for venture capital vehicles, based on Pitchbook data. About 40% of the fund’s capital is in debt-like preferred shares which pay a 7% annual coupon. Including these, the IRR is still 29%. However, right now these are mostly paper profits, based on SoftBank’s own valuations. They don’t necessarily reflect what stock market investors or other buyers would pay.

Industry insiders have begun drawing parallels with Adam Neumann, the co-founder and chief executive of WeWork Cos, also a SoftBank-backed company, who has raised promoter debt, estimated at several hundred million dollars, also by pledging his shares.

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