Name: Prateek Saxena
Roll: 26-A On Campus
News : Indian startup Byju's set to buy test-prep tutor for
up to $1bn
Summary
India's leading startup in online education, Byju's, is set to expand through a corporate
buyout , and has apparently secured a deal for acquiring Blackstone backed Aakash
Educational Services, the brick-and-mortar provider of test preparatory services Ltd,
for $1 billion. Making it the largest-ever acquisition in India's educational services
business. The acquisition will be at least the third buyout for Byju's in the past two
years, after acquiring two companies for a total of $420 million.
Source : Nikkei Asia
Date : 27th Jan 2021
Interpretation:
Byjus current valuation is $12 billion and had recently raised $200 million in a fresh
round consecutively after preivious capital raise worth $500 million. The firm had
almost doubled its revenue, from Rs. 1,430 crore to Rs 2,800 crore in 2019-20. On
further analysis on the article it is found that the deal of $1 bn for acquiring Aakash
comprises of complete exit by founders of Aakash while Blackstone will swap a portion
of its 37.5% equity in Aakash for 5% Byju's stake.
The operaing revenue of Akash is 1214.1 crore in fy 2020 which rose over 10 % from
previous figures , the deal inked i.e of $1 bn (Rs. 7924 crore) , roughly resonates that
Byjus have put the valuation , roughly 6 times of revenue multiple. Considering the
impact of post pandemic scenario in education sector ,the purchase of Aakash would
give Byju's access to 80 million registered users and 5.5 million paid subscribers for
its online courses and as per source INC 42 the expected expenditure ticket size per
student is projected to be 3 times of current levels . That indeed shows that there is
less financial risk involved in this deal for Byju.
However ,as it is known that the purchase price of target company that can be justified
in a buyout is baesd on basically based on following :

The target company’s current and projected free cash flows.

The minimum acceptable rate of return by equity investors.

The financing structure, interest rates and banking agreements.

The equity remaining for a buyer upon a future sale of the acquisition in
multiples of EBITDA
Current and Previous EBITDA Margin of Aakash
As we know the EBITDA margin measures the cash profits a company makes on
annual basis. And for BYJU, viewing the Akash's EBITDA margin must had provided
a better indication for Akash’s health rather than other profit margins because EBITDA
basically downplays the effects of non-operating , depreciation, amortization and tax
factors.As Akash has let go building leasing practises hence there costs related to
depreciation & amortisation quadrupled to Rs 121.7 crore in FY20, EBITDA basically
nullifies the impact.
It is to be noted the main expense of Akash is Employee Benefit Expenses which is
52% in FY 2020
rose over 17% from previous year.However, with limitation of
availability of data the comparison of projection of expenses and its implication of
operating revenue cant be projected.Also , in this case there is not enough detail on
current level of debt to equity involved in M&A , unavailability of projections of free
cash flow of the business over the next five years, including the debt amount used in
the acquisition, which would have been helpful for detailed analysis.