Byju’s in talks to buy out listed US edtech firm Chegg valued at $ 2 billion

Bengaluru | Mumbai: In March this year, Byju Raveendran, the founder and chief executive of edtech firm Byju’s, said he would be pumping $ 400 million of his own capital into his company as part of a larger, $ 800 million, financing round. The transaction reminded many of what Ritesh Agarwal, Oyo’s founder, had executed in 2019, when he bought back stakes held by Sequoia Capital and Lightspeed Venture Partners in the hospitality startup, in what was an unprecedented bulk up of his shareholding.

But, Raveendran has yet to receive the funds through loans which will help him increase his ownership in Bengaluru-based Byju’s, people in the know of the matter said.

Raveendran told ET in an interview that formal commitments were in from several lenders and that between the time the company made the news official and now, negotiations on the terms of the loan led to the delay in closing the transaction.

“It’s largely from banks and large institutions in the US, some of the prominent names’ commitment is there for more than $ 400 million,” Raveendran said, without giving details. “I don’t see any lack of demand for any kind of capital for Byju’s despite strong headwinds out there… This is also a good time for companies to differentiate.”

After two years of a pandemic-led boom, edtech firms are now witnessing a slowdown as physical schools and coaching centers are opening up. In India, Unacademy laid off 1,000 employees (permanent and contractual) as ET reported first. Companies such as Vendantu and Lido Learning also have cut jobs.

Raveendran’s share purchase proposal comes at a time when Byju’s has spent bulk of the funds it raised recently for new acquisitions internationally. It is also in talks for a possible buyout of California-based online tutoring company Chegg, people in the know of the talks said.

Raveendran did not confirm discussions to buy Chegg, which was founded by Osman Rashid and Aayush Phumbhra in 2005 and has a current market capitalization of $ 2.2 billion. But he said the next twelve months would be the best time to acquire companies.

“We have made large, multi-hundred-million-dollar, acquisitions. Globally, we would have made four out of the top ten edtech acquisitions,” he said. “We are looking at large multibillion dollar acquisitions… that’s why we are accessing all kinds of capital. We are exploring acquisitions in the US. ”

This is a good time to consolidate as companies are available at valuations that are attractive, he said.

IPO via SPAC?

There have been talks of Byju’s considering a public listing in the US through a special purpose acquisition company (SPAC) – one that is created for acquiring or merging with an existing company. If it acquires Chegg, a publicly listed firm in the US, it may also help the Indian company go public, said a person in the know.

“This (listing through a reverse merger with Chegg) is not the route to go public in the US,” Raveendran said, without confirming any acquisition talks. we will do an SPAC. We are still thinking of an IPO in around 9-12 months and if it’s in the US, then it would be through a SPAC, “he said. But there have been doubts raised on its SPAC plan, amid a wider market crash and SPACs going out of favor.

Tighter diligence

Amid issues around a lack of corporate governance at startups and enforcing tighter control on companies’ financial reporting, Raveendran said the company has had diligence conducted by investors across its many funding rounds. “If somebody wants to put $ 10-20 million, we can’t let them do full due diligence and open all our books… All the investors who have led big rounds have done deep diligence – commercial, legal and financial – multiple times. We don’t give access to all investors as the same set of investors have backed five other similar companies, he added.

On its financials, Raveendran said the company was still finalizing its annual reports and would have closed FY22 with Rs 10,000 crore in revenue. “This was our projection which we have actually been able to achieve.” Byju’s parent Think & Learn is yet to report its audited financials for FY21 and FY22 with the Registrar of Companies.

In FY20, it reported consolidated operating revenue of Rs 2,381 crore, a jump of over 82% from the previous year, while its losses swelled to Rs 262 crore in the same period from around Rs 9 crore in FY19.

Raveendran said the company struck multiple acquisitions, which delayed FY21 financials filing with the RoC. He added the company is aiming to close FY23 with a revenue of around Rs 17,000 crore. There have been questions asked about why Byju’s is still to file its FY 2021 numbers.

Debt over equity

Talking about the use of debt instruments by non-banking financial company (NBFC) partners to mop up funds from investors, Raveendran said Byju’s has always opted for the cheapest form of capital. But many startups don’t qualify for this and therefore take the equity route, he said. “Compared to normal loans handed out by fintechs, this is significantly lower in risk… A 7.5% interest means it’s a very low-risk financing option. Otherwise who gives these rates? This is being facilitated by prominent NBFC partners and generally, the interest rate would be 13-15%, ”he said. These NBFCs work to offer loans to Byju’s’ customers.

There is a strong track record in collections made by Byju’s partners, Raveendran said. “The interest rate is not fixed by us and if they (NBFCs) are still getting buyers for the product, it means they have been doing this consistently,” he added.

“Debt is one of the most efficient ways of raising capital if you have a proven track record of collecting or financing your customers. These are partners who have been with us for the past three to four years, he added.” We have raised money From Term Loan B (TLB), which is equally attractive. How many startups can access it? For us debt is a lot cheaper than equity, which is why we still have such a high level of ownership, “he said.

Raveendran and his family hold more than 25% in Byju’s, among the highest for an Indian founder. This is expected to go increase to around 28% once his personal investment in the company is closed.