It’s time to talk about the Byju’s situation? And there’s a lot we can talk about. But in today’s Finshots, we’ll primarily discuss how its mega acquisition of Aakash Education Services is playing out. Also, if you're someone who loves to keep tabs on what's happening in the world of business and finance, then hit subscribe if you haven't already.
Before we begin, we just have one thing to clarify. In this story, when we say Byju, we’re referring to Byju Raveendran. And while talking about his company Byju’s, we’re going to refer to it by the name of the parent entity Think & Learn.
Cool?
Let’s dive in then.
The Story
In 2021, Byju Raveendran made a shocking announcement.
His edtech company Think & Learn Pvt Ltd decided to break from its digital focus and buy an offline test preparation company — Aakash Education Services, famous for coaching classes for the IITs and medical entrance exams.
And guess how much Byju agreed to pay for it…
A gargantuan sum of nearly $1 billion!
It was one of the largest ever edtech deals. And no one could fathom why at a time when learning was digital, Think & Learn would choose to suddenly go down this route. Sure, the market for test prep was ~₹40,000 crores and growing, but it was also hugely fragmented with regional players. Aakash controlled just roughly 5% of it. It seemed like a lot of money.
But the simple reason was staring at everyone right in the face — Aakash was profitable.
While Think & Learn was on an acquisition spree, none of the other companies it bought had a bottomline that would impress investors. So Byju simply decided to ‘buy the profits’ by acquiring Aakash.
Packaged together, Think & Learn would be even more attractive to potential suitors, no?
Aakash was the crown jewel. And it became even more obvious a couple of months ago. Divya Gokulnath, the co-founder of Think & Learn and wife of Byju Raveendran, made another massive public announcement on LinkedIn. She said that an Aakash Educational Services IPO was on the cards by mid-2024!
Okay. You could argue that this announcement was a farce. That they simply said it because everything was falling apart at Think & Learn. The company was having a cash crunch (We wrote about it here). And talking about an IPO could perhaps buy them more time.
But choosing to talk about an Aakash IPO instead of a Think & Learn IPO showed just how important the offline test prep company was in Byju’s world.
And here’s something else you probably didn’t know — It’s not just business, it’s personal too.
You see, Aakash isn’t completely owned by Think & Learn Pvt Ltd, the parent company of Byju’s. Rather, Byju Raveendran owns a chunk of it himself through an entity registered in Singapore. He has a personal stake of 27% in Aakash Educatonal Services.
And there are two questions that emerge here.
- Why on earth did Byju Raveendran buy a personal stake in the company?
- Where did he get the crores to finance the deal?
So apparently, the deal to buy Aakash was worth nearly $1 billion and involved a mix of both cash and stock. Simply put, the shareholders of Aakash were expected to get a suitcase filled with cash and shares of Think & Learn. But Think & Learn didn’t have enough money in its bank account. So according to what Byju Raveendran told The Arc, he first approached the existing investors of Think & Learn. He asked them if they wanted a direct stake in Aakash. And when they turned down his offer, he had no option but to try and drum up some money on his own. That was the only way that the deal with Aakash would go through.
Now typically, it’s quite common to pledge the shares you own and take a loan. Byju could’ve pledged his incoming stake in Aakash. Or even his shares in Think & Learn.
But that doesn’t seem to be what happened here. Byju says that he struck a deal with the Qatar Investment Authority, Tiger Global, and a bunch of others — not to raise debt but to share ‘profits’. What this profits mean exactly - we don't know, since Byju's didn't elaborate. But he promised to share some upside with these people, which is why they decided to fund his stake purchase.
Now it all makes sense, no?
If they could pull off a successful IPO for Aakash, it would kill two birds with one stone. It would net Byju a tidy sum of money for all his financial wizardry. And the potential IPO pop could fulfil the promises made to investors who’d given him that ‘personal’ money for the deal.
But right now, nothing seems to be going as planned.
For starters, there’s a $250 million loan to worry about. Once Byju got control of Aakash, he decided to milk this cash cow for all it was worth. So he raised money from a company called Davidson Kempner Capital Management and he gave a part of his shares in Aakash as collateral.
Now the problem seems to be that Byju’s allegedly lied to the investment management company about how the business was structured and even took out money from the loan that it wasn’t supposed to. That’s what The Morning Context reported. Sure, the company has denied these claims. But, there might be some truth this. Because yesterday, as per Economic Times, Davidson Kempner has sent a legal notice to Byju’s and said they’ll take over the pledged shares.
Why would they do that if everything was fine and dandy?
And if that happens, Byju could see a part of his stake in Aakash slip away.
But hold on…that’s not all. The trouble with Aakash doesn’t end there. Remember how we said that when Byju’s bought over Aakash, it was a cash + share deal?
Well, while the cash seems to have been paid out, the share swap hasn’t taken effect yet. This means that the promoters of Aakash still hold 18% in the company. And Blackstone, which is one of the investors, holds 12%.
Now the problem is that both these folks don’t want to execute the share swap. Apparently, they don’t want shares in Think & Learn anymore. After all, the edtech firm’s valuation has fallen by more than 60% in the past year. So they’re asking for cold-hard cash now to execute this deal. Cash which they know that Think & Learn does not really have.
Now we don’t know the nuances of the contract. We don’t know if Byju can enforce it or if Aakash’s promoters and Blackstone might get away by finding some loophole.
Either way, at the moment, it means that Byju is facing a dual threat of losing shares to Davidson Kempner as well as Aakash’s promoters and Blackstone.
And that could be quite catastrophic. Because Aakash apparently contributes to around 30% of Think & Learn’s revenue. Also, it’s the only entity that’s making profits in Byju’s world. So if you remove this crown jewel, things look even worse for his edtech company.
What’s the way out for Byju, you ask?
Well, he needs money. Plain and simple. And there just might be someone willing to swoop in to save the day. We’re talking about Ranjan Pai, the chairman of Manipal Group and also one of the earliest backers of Byju’s edtech firm. On Tuesday, Moneycontrol reported that he might pump in close to $90 million and buy some of Byju’s personal stake in Aakash. That small cash infusion might be enough to pay back Davidson Kempner and hold on to the stake for dear life.
So yeah, we’ll simply have to wait and see how it all pans out. But the one thing we know is that this isn’t the last time we’re going to be writing about Byju and Think & Learn.
Until then…
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