Prosus Pulls the Plug on Byju's, Marks Down Investment Value to Zero

In a devastating blow, Byju's, the once high-flying Indian edtech giant, has lost a key investor. Netherlands-based Prosus, a major tech investor, has written down its entire 9.6% stake in Byju's to zero. This decision, reflecting a staggering $493 million loss, casts a dark cloud over Byju's future and raises serious concerns about the company's financial health and governance.

Earlier this month, HSBC also assigned zero value to Prosus' stake in Byju's, reflecting a growing consensus among investors about the edtech company's troubled financial state. In the first half of the year, Prosus had already marked down Byju's valuation to less than $3 billion, an 86% decline from its peak.

From Golden Boy to Zero Trust: A Story of Decline

This move was disclosed in Prosus' FY24 annual report released on June 24, highlighting a fair value loss of $493 million. At its peak valuation of $22 billion, Prosus' stake in  Byju's was valued at approximately $2.2 billion. However, due to ongoing financial and governance issues, Prosus has reassessed the value of its investment. However, a series of financial and governance issues have eroded investor confidence. 

"We have impaired  Byju's down to zero at the end of FY24. We have written down Byju's primarily because we have inadequate information on the company’s financial health, liabilities, and future outlook," a Prosus spokesperson explained.

Prosus cited "inadequate information on the company's financial health, liabilities, and future outlook" as the primary reason for the write-down.

"Edtech continues to be a very interesting area for us. At the same time, our businesses have not performed. We spent a lot of time to improve their performance. We have three large positions in edtech—Stack Overflow, Skillsoft, and Byju's. All three of them have not performed. Byju's we have written down to zero. Byju's has been an important contributor to challenged performance in the last year," Prosus stated.

Governance Issues and Board Resignations

Byju's was last officially valued at over $22 billion in October 2022, following a $250 million funding round. However, since then, the company has faced numerous governance issues, leading to a series of high-profile board exits. In July 2023, Russell Dreisenstock, Prosus’ representative on Byju’s board, resigned, citing poor reporting and governance structures as reasons for his departure.

Dreisenstock's resignation was part of a broader exodus of board members amid growing concerns about Byju's management. Alongside him, Vivian Wu from the Chan Zuckerberg Initiative and GV Ravishankar from Peak XV Partners (formerly Sequoia Capital India) also stepped down. These resignations occurred as Byju's came under fire for delayed financial results and the resignation of its auditor, Deloitte.

Zero IRR: A Complete Loss for Prosus

Internal Rate of Return (IRR) is a key metric used to measure the profitability of an investment. A negative IRR indicates that the estimated outgoing cash flows exceed the projected incoming cash flows over the investment's lifetime, signaling a loss rather than a profit.

Prosus' internal rate of return (IRR) on its Byju's investment sits at a dismal minus 100%, signifying a complete loss. This stark metric highlights the significant financial blow Prosus has endured. However, the company maintains hope for Byju's future, emphasizing the need for a governance overhaul as the first step towards recovery.

The company's management said in a post-earnings call with mediapersons, "We are seeking protection of our rights and all shareholders. There are a number of actions that the company’s management has taken. We have hope for the company's outlook. The key for us is to change the governance of the company. That is the first step."

Byju's Rights Issue Stalled: A Legal Quagmire

In a separate development, Byju's attempt to raise $200 million through a rights issue, at a valuation significantly lower than its peak, has been further complicated by the NCLT intervention. 

The National Company Law Tribunal (NCLT) had ordered the company not to utilize the funds from this rights issue until the matter is decided in court. Byju's is challenging this order in the Karnataka High Court. This legal battle adds another layer of uncertainty to Byju's already precarious situation.

The roots of Byju's current legal troubles date back to February 2024, when reports surfaced that the edtech major was planning a rights issue at a drastically reduced valuation of 99% from its peak. This move prompted significant unrest among investors, who subsequently organized an extraordinary general meeting (EGM) aimed at removing CEO Byju Raveendran and his family from the company's leadership.

Despite facing legal challenges, the EGM proceeded alongside the controversial rights issue. This led disgruntled investors to file a petition with the National Company Law Tribunal (NCLT), alleging oppression and mismanagement within Byju's. Investors, including Peak XV Partners, General Atlantic, the Chan Zuckerberg Initiative, and Prosus, claimed that Byju's was using funds from the $200 million rights issue in violation of the Tribunal’s order to maintain the status quo of shareholdings.

Furthermore, the investor plea asserted that Byju's had failed to deposit the money received from the rights issue into an escrow account prior to February 27, as required. In response, Byju's denied any wrongdoing.

Financial Performance and Revenue Growth

Amid these legal and governance challenges, Byju's financial performance has also come under scrutiny. The company reported a net loss of INR 8,245.2 crore (approximately $1 billion) for FY22, an 81% increase year-over-year. However, operating revenues showed a significant rise of over 120%, reaching INR 5,014.6 crore during the same period. This growth was largely driven by the company's coaching arm, Aakash.

As Byju's continues to navigate these turbulent waters, the outcomes of its legal battles and efforts to stabilize its financial situation remain critical focal points for stakeholders and investors in the edtech sector.

As Byju's battles legal challenges and attempts to stabilize its finances, the edtech sector is closely monitoring the situation. The outcome of these events will have a ripple effect on the entire industry.

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