Edtech major Byju’s is evaluating several options including raising a down round or a structured funding round as the deadline to clear the dues to private equity firm Blackstone for the Aakash Educational Services deal nears.
As per sources speaking to BT, Byju’s have held several rounds of discussions with a number of Middle East-based investors including Abu Dhabi's Sovereign Wealth Funds (SWF) and Qatar Investment Authority (QIA), but those talks have not progressed to fruition yet. The company has turned down an offer from one of the sovereign funds which offered to invest at a valuation in the range of $10-12 billion, which is about half the valuation it received during last round.
As per an investment banker, the Bengaluru-based edtech giant also had held discussions with Dubai-based GEMS Education and other education investors, but these talks too have collapsed over valuation disagreements.
It would be an uphill task for Byju’s to raise a straight round at $23 billion valuation at this market as private investors look for greater downside protection. The company may have to settle for a down round or accept a structured deal involving high liquidation preferences or guaranteed internal rate of return (IRR), experts say.
“If the company wants to raise at $23 billion in this market, he will have to take a structured way. Investors would ask for a 2-3x liquidation preference, or a guaranteed IRR. These are structures where the headline valuation is meaningless. Private equity funds do these kinds of deals day in and day out whereas VCs look for straight deals. Byju’s, by the sheer size of it, is in a category where they cannot raise capital from the Accels and Sequoias of the world, they are in the PE bracket or even one level up,” said a venture capital investor.
As per Byju’s recent press release, the company has clocked gross revenue of around Rs 10,000 crore or $1.25 billion in financial year 2022. Even at that number, demand for $23 billion valuation is a stretch.
“Even if the company has really achieved this figure and if it grows revenues to $2 billion in FY23, it is asking for 14x multiples to achieve $23 billion valuation. Why would anyone give him a 14x, even in a normal market, 14x is too high. In this market, you will get 5-7x at best. At $2 billion, a 7x multiple will fetch the company only $14 billion valuation. People are not crazy anymore, there is no FOMO. In fact, there is a lot of fear in the economy. Byju’s may raise more funds and they would even announce it as a mark-up on the valuation; however, the inside terms and structures would be very, very different,” an investment banker said.
“An investor may even close a deal at a 1x liquidation preference, but can choose for a 25-33 per cent guaranteed IIR. Suppose they go public in 5 years, a 25 per cent IRR is same as 5x. So, as per such terms, you will have to give 5x to this investor first in the event of an exit. It’s like a liquidation preference, but it is linked to time. Or you can insert a term that gets you a high discount at the time of public listing,” he added.
According to the company’s FY21 financial statement, it needs to pay back the remaining amount of about Rs 2,000 crore to Blackstone by September 23.
"As per the terms of the agreement for acquisition of Aakash Educational Services, consideration to the extent of Rs 1,983 crore was due to be paid by the company to the sellers in June, 2022. This has been deferred to September 23, 2022," company’s official financial statement said.
Sources said the company may seek a brief extension until the end of the month to clear the dues. And Blackstone is likely to offer the company an additional extension as it wants to avoid legal action.
“I don’t see Blackstone litigating at this point in time. This is not a case of fraud, at least there is no proven instance of fraud. If anything, they can only arbitrate, because the agreement speaks about arbitration. I don’t think Blackstone is going to go super aggressive. They will probably give them some extension or try to restructure the deal, which is only the last option. Legal battle would paint Blackstone as a very aggressive investor, and they don’t want that either,” a legal expert said.
An email query send to Byju’s and Blackstone did not elicit immediate responses.
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