Why Innov8 buy makes sense for OYO

In one of its largest acquisitions so far, hospitality chain OYO Hotels and Homes is set to take over Gurugram-headquartered co-working space provider Innov8 for ₹180 crore  to ₹200 crore, a person close to the development told Fortune India. The payment process for the transaction has been initiated, the person, who wanted to remain anonymous, said.

OYO, which is backed by the deep-pocketed Japanese investor SoftBank, has over $1.1 billion on its balance sheet. An OYO spokesperson refused to comment on the transaction.

Experts say getting into the business of providing affordable offices is a natural extension for OYO, which has been rapidly expanding its hotel presence globally over the past 18 months.

“Under all given circumstances, OYO is an asset management company… they manage and run hotels and motels and homes. When it comes to co-working spaces in India, [a] majority of these are single properties with [a] single owner. This segment has been getting traction over the past three-four years, where bigger corporates are also beginning to use these spaces to do away with the hassle of maintaining a building, offer services, etc. With the scale that OYO has, it can bring down the cost of running these spaces further. It makes sense to expand into this fast growing category as they have the expertise in housing and hotel management,” said Anil Joshi, founder and managing partner at Unicorn India Ventures, a venture capital firm, adding that margins tend to be better in managing co-working spaces than in hotels and motels.

OYO already has OYO Life, a long-term, co-living, fully managed, rental housing for millennials and those in their first jobs, and experts believe there are strong synergies between co-living and co-working models.

“The co-working model has similar shared economy characteristics as the co-living segment, and hence it makes sense for any asset manager focussed on real estate to find leverage across both. Ultimately both pieces should provide synergies such that the sum of parts is greater than the value from individual pieces alone,” said Mayank Singhal, managing partner at Millennial Capital, an investment firm.

Last week, OYO said it would invest ₹1,400 crore in its India and South Asia business to double down on its expansion plans and improve customer experience. The company said it aims to focus on investing and franchise building to take advantage of the global $3.6 trillion accommodation market opportunity rather than chase short-term goals like profitability.

The company’s losses as a percentage of realised value (OYO Hotels’ sales run rate) has been reducing year-on-year from 44.5% in FY17 to 20.3% in FY18. In FY 2018-19, OYO estimates losses will go down to 10.4%, it said in a statement last week. With 515,000 rooms in 10 countries and over 500 cities, OYO Hotels’ sales run-rate for the year ended December 2018 stood at $1.8 billion, a growth of more than four times year-on-year. India contributed with $1.2 billion, with 50% PAT (profit after tax) improvement annually, the company said.

“With a strong balance sheet, today we can go to more places than ever, introduce new categories, invest in our assets, while maintaining our high-quality standards, without raising any further capital,” Ritesh Agarwal, founder and group CEO, OYO, had said last week.

In the meantime, according to several media reports, OYO is also in talks to acquire online food delivery startup FreshMenu for $30 million to $40 million. The person cited above confirmed that talks are underway. Currently, nearly 25% of OYO’s revenue comes through the kitchens it operates in its hotels. Experts say food can be a very strong way of keeping the consumer hooked and expand business.

“For any resort or hotel, food is almost always the largest revenue generator. The key is to have a smart menu and fast moving kitchen. If OYO can leverage it, the captive consumption will help it a lot. They can offer different products to the same consumer,” said Joshi.