3/4/2024: What Happened to 2U?
I haven’t continued my Dead Unicorn series for a while. I did write a few more stories but they were all quite negative and depressing. They are also basically the same story: the team worked hard but the business model was flawed at day one. I will find a proper time to publish these stories but in essence the takeaway was that easy money created dumb companies. There are going to be more companies that fit this profile going bankrupt this year. I will create a list and summarize at some point.
But today I have a slightly different story to tell. 2U, an ed tech company that helps universities offer online degrees, is broke. The company once had a $5B market cap but as of today its market cap stands at $35M. So what happened? The company’s core business was actually not terrible. Its 2023 adjustedEBITA was ~$170M. But the company has been bleeding cash because of the large interest payments as shown above.
2U had a pretty healthy balance sheet until it purchased edX for $800M in 2021. Its net debt went from zero in 2020 to $600M in 2021 and $1B+ today. In its Q4 earnings release, the company projected a net decline in revenue and ~$120M of adjusted EBITA in 2024. In the release, the company also gave a warning about the viability of the business:
The company expects that if it does not amend or refinance its term loan, or raise capital to reduce its debt in the short term, and in the event the obligations under its term loan accelerate or come due within twelve months from the date of its financial statement issuance in accordance with its current terms, there is substantial doubt about its ability to continue as a going concern. The company's financial statements will be included in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
It appears 2U might have been doing OK if they didn’t take on debt to make the big edX acquisition. But now they have so much debt that their EBITA couldn’t cover the interest payments. In other words, the company has a liquidity problem. Its tangible book value is negative $900M at the end of 2023 so it is also insolvent. From the esoteric company statement above it seems to indicate their current shaky financial standing triggers a clause in the debt agreement that certain loans have to be paid back within twelve months. It’s likely the company will have to restructure aka file a Chapter 11 bankruptcy. This explains why the equity investors are being wiped out. This mess could have been avoided if the company were more fiscally conservative. I suppose being fiscally conservative was not in vogue in 2021 but actions have consequences. This is what happens when people and companies over leverage themselves.