Nurs­ery Rid­ers Come in the Way of OYO’s Zo Ac­qui­si­tion

Ven­tureNurs­ery’s de­mand that it be given ac­cess to in­for­ma­tion and the right to exit at a pre-de­ter­mined val­u­a­tion has stalled the ac­qui­si­tion process

The Economic Times - - Disruption: -

Aditi Shri­vas­tava & Mad­hav Chan­chani

Bengaluru: Bud­get ho­tel ag­gre­ga­tor OYO Rooms has hit a hur­dle in com­plet­ing its ac­qui­si­tion of ri­val Zo Rooms with fresh de­mands from one of its early in­vestors stalling the process, ac­cord­ing to four peo­ple aware of the ne­go­ti­a­tions.

Ven­tureNurs­ery, a Mum­bai-based ac­cel­er­a­tor which was the first in­vestor in OYO, is de­mand­ing that it be given ac­cess to in­for­ma­tion that large in­vestors typ­i­cally re­ceive from a com­pany as well as the right to exit from the com­bined en­tity at a pre-de­ter­mined val­u­a­tion, the sources told ET. “Ven­tureNurs­ery is de­mand­ing right to in­for­ma­tion and exit at $700mil­lion val­u­a­tion, both terms which are un­ac­cept­able to OYO’s larger share­hold­ers,” said a per­son di­rectly fa­mil­iar with the devel­op­ment.

Ac­cord­ing to the terms of the ne­go­ti­a­tion, Tiger Global, an in­vestor in Zo Rooms, is likely to get right to in- for­ma­tion in the merged en­tity, said two sources. Ex­perts and in­vestors are of the view that while Ven­tureNurs­ery does not have enough shares to block the pro­posed merger be­tween the two star­tups, its de­mands need to be ad­dressed now, since it can throw a span­ner in the works for OYO, which is look­ing to raise fresh cap­i­tal. ET re­ported last month that a new round of fund­ing of upto $100 mil­lion for OYO could be led by exis- ting in­vestor SoftBank. OYO de­clined to com­ment on the fundrais­ing. Email queries sent to Ven­tureNurs­ery co­founders Ravi Ki­ran and Shra­van Shroff and Zo Rooms’ co­founder Paa­van Nanda did not elicit a re­sponse.

“Un­der the Com­pa­nies Act there is no mi­nor­ity pro­tec­tion for less than 10% stake,” ex­plained Vaib­hav Parikh a part­ner at law firm Nishith De­sai As­so­ci­ates.

“How­ever, if (rights) are un­der share­holder agree­ment then it’s a con­trac­tual en­gage­ment and Ven­tureNurs­ery can sue for dam­ages but not stop the deal,” he ex­plained.

While Ven­tureNurs­ery’s ob­jec­tions are one of the im­ped­i­ments to the deal, another fac­tor, said a source, could be dis­sen­sion within OYO, with some man­agers not con­vinced about the terms ne­go­ti­ated by its share­hold­ers which give Zo Rooms a 7% stake in the com­pany. “By de­lay­ing the pa­per­work, OYO man­age­ment could be look­ing to rene­go­ti­ate the terms al­ready set by its share­hold­ers,” said one of the peo­ple quoted above. The startup is rene­go­ti­at­ing the share­holder agree­ment as it seeks to com­plete the merger and pro­ceed with a new round of fund rais­ing. The on­go­ing dis­pute has thrown the spot­light on three of In­dia’s big­gest and most in­flu­en­tial in­ter­net in­vestors — Tiger Global Man­age­ment, SoftBank, and Se­quoia Cap­i­tal . “The deal will go through at a 7% share swap, since the trans­fer of Zo’s as­sets and (in­clu­sion) of some of its em­ploy­ees in OYO’s pay­roll has al­ready hap­pened three months back,” said one per­son with di­rect knowl­edge of the trans­ac­tion, say­ing that se­nior fig­ures at Se­quoia and SoftBank are de­ter­mined to abide by the agree­ment.

“Be­ing a re­spon­si­ble startup, we keenly abide by the fun­da­men­tals of cor­po­rate governance and re­spect the sanc­tity of board­room dis­cus­sions. We have no fur­ther com- ments,” said an OYO spokesper­son in an emailed re­sponse.

A rep­re­sen­ta­tive for SoftBank de­clined to com­ment for this story. Se­quoia Cap­i­tal’s In­dia MD Gau­tam Mago did not re­ply to email queries from ET. From a le­gal per­spec­tive a bind­ing con­tract is not only on pa­per but also un­der­lined by ac­tion and be­hav­iour. “If OYO has ac­cepted and taken over the as­sets, Zo should get due com­pen­sa­tion and the court is likely to up­hold that,” said Parikh. The dis­agree­ment with Ven­tureNurs­ery points to a larger is­sue of con­flicts brew­ing in the In­dian startup sec­tor.

ET was the first to re­port about OYO en­ter­ing into talks to ac­quire Zo Rooms in its De­cem­ber 3 edi­tion. SoftBank later con­firmed the devel­op­ment, by men­tion­ing ac­qui­si­tion of Zo Rooms in an in­vestor pre­sen­ta­tion. While nei­ther OYO nor Zo Rooms has pub­licly con­firmed the ac­qui­si­tion, the trans­fer of as­sets and le­gal and fi­nan­cial due dili­gence have been com­pleted. Fi­nal share al­lo­ca­tion is yet to hap­pen and papers are still not signed.

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