Companies
Saving edtech company Byju’s: Inside the great rescue act
Summary
- As the edtech company navigates its year from hell, three men are putting the guard rails around it
Mumbai: In late September, Ajay Goel told Byju’s, India’s best known edtech startup, that he was resigning as the chief financial officer (CFO). A calm, introverted executive, Goel had been hired only a few months earlier—in April—after an 18-month search for a CFO. The resignation, therefore, came as an unexpected setback and added to the long list of woes that has sunk the company into a quagmire of distress over the last one year.
Byju’s has struggled to file its audited financial statements on time. In June, Deloitte Haskins & Sells resigned as its auditor, noting that the founders had not responded to several emails on the 2021-22 financial statements. Then, three investor-external board members—from Peak XV Partners, Prosus Ventures and Chan Zuckerberg Initiative—also resigned within weeks of each other. Prosus and Peak XV cited corporate governance lapses as their reasons for stepping down. Byju’s, meanwhile, was facing litigation from lenders while also struggling to raise equity capital.
The edtech company, perhaps, did not have proper internal controls. This week, the directorate of enforcement, India’s economic intelligence agency, said it is investigating the company because it failed to properly document transactions involving foreign capital. This includes investments received as foreign direct investment.
A darling of the investors once upon a time, the company is now worth less than 10% of the $22 billion it commanded in March 2022, CB Insights, a market intelligence firm, stated this month.
Goel’s departure—he left to join mining giant Vedanta Ltd—was a shocker in this context. The exit triggered anxieties within the company’s investor ecosystem and raised eyebrows in the broader startup world. What did he see that the outside world did not? He simply received an offer from Vedanta which was too good to refuse, some believe.
Nonetheless, there is a sliver of hope in the middle of all this bad news. Byju’s has managed to find three white knights and the trio is trying to pull the company out of the quagmire it finds itself in.
The company had announced an ‘advisory council’ in July, led by Rajnish Kumar, the former chairperson of the State Bank of India (SBI). The council also has Mohandas Pai, a former board member of Infosys who is also a venture capitalist and the current chairperson of Manipal Global Education. The third saviour is Ranjan Pai, the chairman of the Manipal Education and Medical Group, also an investor. The two Pais are unrelated to each other.
They are already making an impact. Byju’s built its empire on an aggressive acquisition strategy. Under the guidance of Kumar and Mohandas Pai, the company has now drawn up a more cautious charter. In a reversal of sorts, it is looking to offload assets. In September, the company hired Arjun Mohan as the chief executive officer (CEO) of its India operations. Mohan is an old hand—he was Byju’s chief business officer earlier. He will now oversee the restructuring of the core business, the online K-12 (kindergarten to class 12) learning, to manage the company’s working capital woes. Byju’s is shifting from an online-only model to a hybrid structure, with the launch of Byju’s Tuition Centres or a network of classroom centres. Well, times have changed.
“The hypothesis that massive open online courses will change the way people consume education has eroded after the pandemic," said Suresh Bhagavatula, professor of entrepreneurship at IIM-Bangalore.
These moves will most definitely shrink Byju’s size in the near term. The question is can it thrive again and be the edtech bellwether it was?
That’s a tough one to answer. As of now, the three men are cleaning up parts of the firm’s murky past and appear to have more influence than any of Byju’s investors.
Fixing compliance
Kumar and Mohandas Pai began working with Byju’s in the hair-raising weeks after the company lost its investor-board members and its auditor in June. The story goes that co-founder Divya Gokulnath, a self-confessed ‘peoples-person’, reached out to the duo to pitch the merits of an advisory council.
After he came on board, Mohandas Pai told observers and investors that he is only serving as a guide to shore up founders’ credibility in the market. In the world of finance, Pai is a credible name himself, having been the CFO and a board member of IT bellwether Infosys Ltd for several years. Infosys has been a trendsetter in corporate transparency and good governance practices.
Nonetheless, Pai appears to be doing much more than shoring up Byju’s credibility. According to several people Mint spoke to, he is sitting in on calls with lenders and investors. In addition, he has suggested a good governance framework and is now a sounding board to the founder family.
Mohandas Pai, according to one person Mint spoke to, tutored the founders on where to draw boundaries–with the media and all other stakeholders. “Byju’s is still a private limited company but the founders have a tendency to reveal more than they need to. Pai has helped them reset expectations," the person added. He didn’t want to be identified.
Mohandas Pai declined to comment, directing all queries to the company.
Meanwhile, Rajnish Kumar comes with the credibility of being a problem solver. At SBI, he had overseen sticky situations such as the rescue of Yes Bank and the resolution plan of Jet Airways. As the chairperson of fintech company BharatPe, he was at the helm when the company investigated fraud charges against a co-founder.
When Kumar took on the task in July, he told Mint that the first step would be to address issues around compliance. “The second step would be to advise them (the founders) on a revamp of the organizational structure, and that is a very clear accountability framework," he said.
“Issues arising at Byju’s are mostly around compliance. Professionals are needed to run when corporations grow beyond a certain size. Not everything can be done by the promoter or the managing director. So, there will be a thorough review. Then, monitorable and deliverable action points will be drawn," Kumar added, during an interview on 13 July.
Founder and CEO Byju Raveendran, the husband of Divya Gokulnath, has largely been the driving force behind the company and has raised over $6 billion in capital from over 70 institutional investors almost single-handedly. For long, he struck deals with investors and lenders at will, without ceding ground on typical investor rights such as a liquidation preference, but some of them—like the one with Davidson Kempner, a New York-based alternative investment management firm with over $36 billion in assets under management—weren’t the most wise.
By July, Byju’s equation with its investor cohort was broken. Since then, a ‘working group’ has emerged, the people cited above said. The group, consisting of Byju’s top investors, Kumar and Mohandas Pai, meets once a week to discuss outstanding issues. Seen as a father figure by the Raveendrans, Mohandas Pai has acted as a buffer between the company and investors, a person familiar with the company said.
Aarin Capital, which is run by Mohandas Pai and Ranjan Pai, was the first investor in Byju’s and had exited with handsome profits in 2016.
Saving Aakash
Ranjan Pai’s impact has been more material for Byju’s, as he saved a crown jewel from changing hands and is helping Think & Learn Pvt Ltd, which operates Byju’s, gain control with 51% stake.
In April 2021, Byju’s acquired test-preparation company Aakash Educational Services Ltd (AESL) for approximately $950 million in cash and stocks. The agreement then valued Think & Learn at $11 billion to benchmark the future equity swap.
Aakash is co-promoted by Aakash Chaudhry, also its CEO back then, and had private equity firm Blackstone as an investor.
While the cash deal was settled, the stock swap deal was delayed for over two years. This meant that the shareholding was split—Chaudhry and Blackstone collectively owned 30% of AESL, while parent Think & Learn owned 43%. Byju Raveendran owned the rest 27%.
Trouble brewed after Chaudhrys and Blackstone declined to swap shares in AESL with Think & Learn. Separately, Byju’s had also pledged the bulk of its shares in Aakash with Davidson Kempner, in exchange for ₹2,000 crore as loan.
The terms were harsh but Byju’s simply needed the money—the noise around poor corporate governance practices at the company kept other investors away.
The situation worsened when Byju’s lenders in the US declared a default on the company’s $1.2 billion loan, taken in November 2021. This became public in June and the default triggered a cross-default on the loan extended by Davidson Kempner where Aakash shares were the collateral.
Post the default, Davidson Kempner held back ₹1,400 crore out of the ₹2,000 crore loan, but the covenants also allowed them a lot of say in the running of Aakash’s board. Byju’s needed to urgently repay Davidson’s outstanding loan and acquire the balance shares in the company to fully secure the acquisition. But then, it was dealing with cash flow problems.
Enter Ranjan Pai. Through his family office, he was able to buy out the non convertible debentures held by Davidson Kempner earlier this month. Byju’s paid back ₹1,400 crore on the ₹800 crore that Davidson Kempner transferred in the first tranche. This included ₹600 crore of interest, a sweet outcome for Davidson Kempner.
Ranjan Pai and Davidson Kempner did not offer comments.
Ranjan Pai is now helping Byju’s clean up the Aakash capitalization table—a table that provides details of equity ownership of all stakeholders.
Overall, his investment in Aakash is expected to total $350 million. This transaction allows parent Think & Learn to acquire an additional stake in Aakash and cross the 51% stake mark from the 43% it held earlier. Ranjan Pai is eventually expected to pick up around 30% stake. The Chaudhrys may retain around 8-9% while Blackstone, which declined to comment, is expected to fully exit over time. Byju Raveendran will retain some stake in its subsidiary through a personal entity.
“It is quite fortuitous that they found someone who sees value in one of their companies," said IIM’s Bhagavatula.
To be clear, this is also a great transaction for Ranjan Pai—part of the deal was struck at a sub-$1 billion valuation, which is lower than what Byju’s acquired Aakash for in 2021.
A billion dollar question
Let’s circle back on the $1.2 billion loan, the most thorny issue that plagues Byju’s.
The history of this loan dates back to November 2021, when Byju’s raised the money from US lenders as interest rates were cheap. One of the covenants of the loan agreement was timely filing of its annual statements. The other was getting WhiteHat Jr, a company bought by Byju’s for $300 million, to stand as guarantor for the loan.
Neither happened. Byju’s delayed its annual statements—Think & Learn’s standalone numbers for 2021-22 were released only this November, after a 19-month delay.
Byju’s US lenders declared a default and demanded immediate repayment of $1.2 billion in March. The lenders pursued aggressive legal action in the US, alleging that Byju’s had wrongfully moved over $500 million to avoid repayment.
Initially, the edtech firm resisted full repayment. The repayment schedule was till 2026 and it had to make an interest payment every quarter. An immediate repayment of the full loan amount would have hurt, particularly considering the harsh funding winter.
When Byju’s adopted a confrontational approach with the lenders in June, many investors were aghast. Raveendran has historically kept his cards close to his chest when it came to striking deals. For instance, even his top investors had not specifically seen the debt agreement he signed with the lenders back in November 2021.
After the advisory council took over, Byju’s changed its tune. Kumar and Mohandas Pai have helped the company negotiate with its overseas lenders. They are going through every agreement that Byju’s needs to sign with the lenders and are advising on other transactions.
Byju’s has now proposed to raise $800 million to $1 billion through the sale of two of its assets—Epic and Great Learning – and repay the outstanding $1.2 billion. In September, the company proposed a six-month repayment schedule for the outstanding amount, which included a $300 million payment within three months.
Both the assets came through acquisitions. In July 2021, Byju’s acquired Epic, a California-headquartered reading platform. The same month, it acquired the Singapore-headquartered Great Learning, which offers professional upskilling and higher education courses.
Raising the billion dollars, by far, is Byju’s biggest headache as it is not clear if it can manage to sell these assets and raise the capital in a timely fashion. Further, it would need to find the rest of the capital—$200 million or more—apart from the interest it has to pay.
The great shrink
The asset sale will shrink the edtech company’s size. Once, the company had global ambitions. However, 90% of its revenue, going forward, will be generated from India. According to industry watchers Mint spoke to, the founders have made peace with the new paradigm.
Byju’s has been shrinking in terms of employees as well. The sharpest cuts were made after Arjun Mohan took over as the CEO of the India business in August. At its peak, in 2021, the edtech firm had more than 50,000 employees. Once it completes the latest round of retrenchment, it will have less than 30,000 employees across its subsidiaries.
In addition, Mohan has collapsed various units and cleaned up the top heavy organizational structure. More than 100-125 executives, with over ₹1 crore in salary per annum, have left the company, an executive at the edtech firm, who didn’t want to be identified, said.
People cuts will help shore up the bottomline, which continues to bleed. Think & Learn reported a core business standalone loss of ₹2,253 crore for 2021-22. At a consolidated level, the company’s losses are expected to run up to ₹6,000- ₹8,000 crore, in part because of the impairments from previous acquisitions.
Whitehat Jr, which cost the company nearly ₹220 crore per month in marketing expenses over the last two years, may be majorly responsible for the giant hole in its accounts. In 2021-22, the subsidiary is expected to report a loss between ₹3,000 crore and ₹3,500 crore, including impairments.
Byju’s has now put the lid on marketing spend—its marketing expenses are now close to zero, a company executive cited above, said. “At one point, it was close to 60% of the total expenses," the person said.
In its high flying years, Byju’s had roped in Bollywood superstar Shahrukh Khan to promote the brand, sponsored the Indian cricket team, and signed up the world’s best footballer, Lionel Messi, as a brand ambassador. That era is over.
It is likely that Byju’s new avatar has been shaped by the two Pais and Kumar. And going ahead, they would probably rein in Raveendran from any extravagant dealmaking or expensive sponsorships.
Even investors in the company have realigned to a much smaller Byju’s by now. As long as it survives, and has a plan to grow, they may not lose their shirt. In hard times, small is beautiful.
