Oyo Rooms, in which SoftBank has a stake, bought Zo Rooms in an all-stock deal, according to two people familiar with the transaction. The founders of Zostel Hospitality Pvt. Ltd, which runs Zo Rooms, will get a 7% stake in the combined entity, the people said, requesting anonymity.
The transaction comes amid a slowdown in start-up funding as investors are becoming increasingly risk averse and unwilling to fund start-ups that aren’t market leaders in their respective sectors. The acquisition comes as Zostel Hospitality failed to convince investors, including existing ones, to pump in money. Zo Rooms raised roughly $35 million from Tiger Global and Orios Management in 2005.
Oyo Rooms, on the other hand, is on a firmer footing, having raised $100 million from SoftBank in August.
Oyo reported a 34-fold growth from the previous year with used rooms nights rising to 895,000 in the October-December quarter of 2015, SoftBank’s earnings release said.
The release added that the period also saw, “acquisition of Zo Rooms,” without giving details.
Mint reported in December that Oyo was in talks to buy Zo Rooms.
Zo Rooms had close to 300 employees and 20,000 listed properties across 30 cities. However, not all of this will be absorbed by Oyo, one of the people cited above said.
In comparison, Oyo has been operating in more than 165 Indian cities through close to 4,500 hotels. Last month, it started operations in Malaysia, the company’s first foray outside its home market.
With the acquisition of Zo Rooms, Oyo becomes a clear market leader in the budget accommodation segment which recently saw the entry of large online travel firms, including MakeMyTrip, Yatra Online Pvt. Ltd and Goibibo. However, the revenue potential of the hotel aggregator websites is still remains unclear given their relatively short existence. On the other hand, the entry of online travel agents, with their large customer bases is likely to intensify competition in an unproven business.
Oyo declined to comment on this.
Still, the market potential is large and analysts have frequently said that the supply of hotel rooms in India is way below demand.
Budget hotel start-ups invest millions of dollars in branding unorganized and independent hotels, training their staff and also buying inventory (hotel room bookings) for months.
Occupancy rates inevitably tend to remain low, partly as these brands are new. Despite being relatively well-funded, budget hotels have failed to show meaningful revenues so far, investors say.
This story was first published on Livemint.com