HSBC has raised significant concerns regarding the future of Indian edtech behemoth Byju’s, slashing the value of Prosus’ nearly 10% stake in the company to zero. This alarming assessment surfaces amidst Byju’s escalating legal challenges and deepening financial woes.
Prosus, a Dutch-listed technology investment giant, had invested $500 million in Byju’s, making it one of the company’s major backers in the Indian edtech sector. However, this substantial investment has now turned sour, reflecting the precarious state of Byju’s financial health and legal standing.
In a note to investors on May 21, HSBC highlighted several critical factors contributing to their dire outlook. “We assign zero value to Byju’s stake amid multiple legal cases and a funding crunch,” HSBC stated. “Previously, we valued around 10% stake in Byju’s by applying an 80% discount to the latest publicly disclosed valuation.”
The once-promising edtech company is currently facing a severe cash crunch and numerous legal issues. HSBC’s report was released in tandem with Byju’s controversial $200 million rights issue, priced at a staggering 99% discount from its peak valuation of $22 billion. Investors who opt out of participating in the rights issue risk seeing their holdings wiped out. Despite claims from Byju’s founder, Byju Raveendran, that the rights issue is fully subscribed, the National Company Law Tribunal (NCLT) in Bengaluru has mandated the company to hold the majority of the capital from this issue in an escrow account. This directive is due to an ongoing dispute with investors, including Prosus.
The situation is further complicated by Byju’s legal action against Prosus and other investors, seeking the removal of CEO Raveendran. This legal battle, currently unfolding in the Karnataka High Court, adds another layer of complexity to the already tumultuous scenario. The simultaneous cases in the NCLT Bengaluru and the Karnataka High Court significantly heighten Byju’s legal troubles, underscoring the fragile state of the company.
Compounding these legal challenges, Byju’s is also struggling with operational difficulties stemming from the severe cash crunch. The departure of India CEO Arjun Mohan in April has left Raveendran to manage the daily operations of the Indian business single-handedly, adding to the strain on the company’s leadership.
Moreover, Byju’s faces legal battles in the United States concerning a $1.2 billion term loan B. On June 5, a consortium of lenders filed a petition in a US court to initiate bankruptcy proceedings against Byju’s subsidiaries Epic, Tynker, and Osmo, which were guarantors for the syndicated term loan. This legal action in the US further exacerbates Byju’s already critical situation.
The ongoing financial and legal turmoil places Byju’s future in a precarious position. With investors growing increasingly wary and legal battles mounting on multiple fronts, the company’s ability to navigate through this crisis remains uncertain. The zero valuation assigned by HSBC signals a dramatic shift in the perception of Byju’s market worth and serves as a stark warning to stakeholders about the significant challenges that lie ahead.
