Byju’s Worth Now Zero: HSBC's Assessment of Once $22 Billion Edtech

In a striking development, HSBC has declared that the nearly 10% stake held by Dutch-listed technology investment firm Prosus in the Indian edtech giant Byju’s is now worth nothing. This valuation reflects a deepening financial crisis and ongoing legal battles plaguing Byju’s.

HSBC's Report: A Stark Valuation

HSBC's latest assessment, released on May 21, highlighted the severe challenges facing Byju’s.

"We assign zero value to Byju’s stake amid multiple legal cases and funding crunch," the report stated. HSBC had previously valued the stake with an 80% discount to the last publicly disclosed valuation. Prosus, which has invested over $500 million in Byju’s over the years, has seen its investment turn sour amidst escalating troubles.

Controversial Rights Issue

The timing of this report coincides with Byju’s controversial $200 million rights issue, offered at a staggering 99% discount from its peak valuation of $22 billion. This issue means that any investor not participating will see their holdings effectively wiped out. Byju’s founder, Byju Raveendran, has claimed that the rights issue is fully subscribed. However, an ongoing dispute with investors, including Prosus, has led the National Company Law Tribunal (NCLT) in Bengaluru to order that the majority of the capital raised be placed in an escrow account.

Legal Battles on Multiple Fronts

Byju’s is entangled in multiple legal disputes. Prosus is currently involved in a case at the Karnataka High Court, where Byju’s has petitioned to remove CEO Raveendran following an extraordinary general meeting called by a group of investors. This legal wrangling is in addition to the NCLT proceedings, both of which continue to exacerbate the company's woes.

In the United States, Byju’s is also fighting a legal battle with its term loan B lenders over a $1.2 billion loan. On June 5, some lenders petitioned a US court to initiate bankruptcy proceedings against Byju’s subsidiaries Epic, Tynker, and Osmo, which were guarantors for the loan.

A majority of Byju’s lenders have filed for involuntary Chapter 11 bankruptcy against three US-based guarantors for a $1.2 billion loan. The petitions target Byju’s subsidiaries Epic! Creations Inc., Neuron Fuel Inc., and Tangible Play Inc. Glas Trust Co. LLC, representing over 85% of the lenders, is the administrative agent.

“Since Byju’s began to default on its term loan obligations shortly after we provided Byju’s Alpha (the US subsidiary of Byju’s) with financing in 2021, we have made every effort possible to work productively and collaboratively to help Byju’s cure its multiple defaults," the lenders said.

“However, it is clear that Byju’s management has no intention or ability to honour its obligations. Indeed, Byju’s founders, who also serve as the three directors of the overall enterprise—Byju Raveendran, Riju Ravindran and Divya Gokulnath—unlawfully diverted $533 million in loan proceeds, the whereabouts of which are still unknown," the lenders added, according to a media report.

Operational Struggles and Leadership Changes

The financial difficulties have had a significant impact on Byju’s operations. The company’s India CEO, Arjun Mohan, resigned in April, leaving Raveendran to manage daily operations. These operational challenges have further strained the company’s ability to stay afloat amid a severe cash crunch.

Broader Market Implications

HSBC's note also casts a wider net, suggesting that Byju’s is not the only startup experiencing a drastic reduction in valuation. The bank estimates that the valuations of several other startups, including Pharmeasy, Meesho, DeHaat, and ElasticRun, have significantly decreased from their peaks. For instance, Pharmeasy is now valued at $2.8 billion, down from $5.6 billion in 2021, while Meesho’s valuation has dropped to $2.5 billion from $4.9 billion.

In its report, HSBC applied a 50% discount to the latest funding round or acquisition price for assets where the last round occurred more than six months ago. This adjustment reflects the recent correction in public sector multiples for similar edtech and SaaS companies.

Prosus' Investment Woes

Prosus, one of Byju’s largest investors, has publicly criticized the startup for disregarding its advice. This public rebuke underscores the strained relationship between the investor and the company. The current funding round, valued at a post-money valuation of about $250 million, is legally disputed by some of Byju’s largest investors, including Prosus.

As Byju’s navigates through these turbulent waters, the edtech giant faces one of the most significant valuation declines in recent startup history, leaving investors like Prosus grappling with the fallout.

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