Anthology Finances in the News Again

On Sunday Misty Frost from Instructure passed away. This was a gut punch - not technically a surprise, but it caught me off guard and stopped me in my tracks. It hurts. Misty was a giant in EdTech, even if she was not a household name. She will be missed - I have more of a write up at LinkedIn.

Anthology, the EdTech conglomeration that acquired Blackboard just over three years ago, is restructuring its debt (and ownership) again. The specific news is that Anthology skipped its interest payments on its second-lien loan at the end of December, as reported in 9fin and in a Bloomberg email (the latter quoted below). Like 2U and OLC and so many other organizations, it’s all about fixing balance sheets.

As noted, Anthology did not default on its debt payments due to the waiver, but the clock is ticking. Negotiations will now begin between equity holders (Veritas Capital, a private equity firm that is the primary owner) and first-lien lenders and the company itself.

Anthology History

Anthology was created in 2020 as a new brand when Veritas and Leeds Equity Partners combined Campus Management, Campus Labs, and iModules into one company. Campus Management was the core, providing student information system (SIS) and CRM and other administrative software for mostly higher education markets, historically focused on the for-profit sector.

In the meantime, Providence Equity Partners was putting Blackboard up for sale. In Fall 2021, Anthology agreed to purchase Blackboard. Blackboard was the bigger company, roughly twice the revenue and valuation of Anthology, but Anthology had better financial backing and willingness to invest, so the smaller acquired the larger. Blackboard became a product line, no longer an independent company, although it maintained its brand unlike the other parts of Anthology.

In a subsequent post, I described discussions with Anthology’s then-CEO Jim Milton and Blackboard’s then-CEO Bill Ballhaus describing the rationale for the deal.

Keep in mind that both acquisitions occurred during the pandemic, when investor sentiment in EdTech was at a peak. I questioned the core logic at the time and have maintained this view.

Despite what I considered faulty assumptions, Anthology appears to have improved the operational management of Blackboard and made many improvements and even investments, particularly in generative AI.

The problem is that the deal structure was based on 2021 assumptions. Market valuations for software companies were at a peak, interest rates were low (essentially free money), and Covid usage bumps made it seem like Anthology was taking off. Last year, equity and lenders had to step in and recapitalize the company (i.e., restructure the just-over $1 billion in debt along with the addition of roughly $250 million in working capital) to provide a runway of roughly two to three years, allowing Anthology to continue investing in AI and other product improvements. This move roughly coincided with the replacement of Jim Milton with Bruce Dahlgren as CEO.

With the new leadership came an aggressive round of cost cutting, with layoffs and offshoring (primarily to India) and increased moves to fully integrate the conglomeration of companies. In a discussion with Dahlgren, he described total cost reductions on the order of 25%.

Skipped Interest Payment

What has become apparent to everyone involved is that last year’s investment essentially kicked the can down the road and did not solve the core problem. Dahlgren, however, describes the two financial moves as part of a plan, not a change in assumptions. At the time (April 2024), Moody’s considered “the amendment to the credit agreement and loan repurchases at a discount to par as a distressed exchange, which is a default under Moody's definition.”

Regardless (and both could be true), the company has not met the owners’ and lenders’ expectations on client retention and growth prospects overall, although Dahlgren described that the company’s sales grew during the two most recent quarters. Essentially, the company’s performance has not grown into the capital structure, meaning that Anthology simply has too much debt requiring unsustainable interest payments for a company of its actual size. The company has to get past 2021 assumptions.

This is what led to last week’s news.

Additional Context

As part of my research, I have looked at market reports and bond ratings. In addition to the Dahlgren interview, I have talked to several anonymous sources with knowledge of the matter.

What I can report is that it appears all three parties - Veritas, first-lien lenders, Anthology - agree on the concept. Lower the total debt in exchange for equity for the lenders, and I hear similar language from my sources. Second-lien lenders are not in the same camp. What are the lenders looking for? It appears they want the company to be restructured to have realistic debt, perhaps cutting it in half or even further. That would require Veritas to essentially take a hit on its holdings, giving up equity in exchange for debt holders converting a large portion of debt into equity. What is Veritas looking for? It appears they want lenders’ support to reduce debt without requiring new capital investments. What is Anthology looking for? They want reduced interest payments and a sustainable balance sheet structure to enable investment and growth.

The challenge will be in the details of negotiations. Wait, you want how much equity based on the converted debt? What new covenants will be placed on the new debt? Already I have heard different target ranges for the amount of debt conversion. Further, there is a question of how Veritas wants to play this out, even if there is agreement on the concept of lowering debt. Should Veritas simply purchase at a discount / write down equity and remain the primary but not exclusive owner, should it consider selling equity and getting someone else in as primary owner to see this through, should it walk away, or something else? I don’t believe we know yet.

According to Dahlgren, if you separate out interest payments, Anthology is already generating cash. He said he is very proud of how resilient the company is, even introducing new offerings while the company cut costs.¹ Dahlgren was clear that Anthology has cash and can make payments, but he acknowledged that under current assumptions there would be an issue with the debt wall (when the term loans are due in 2029). Further, making large interest payments will hold the company back from making acquisitions or further investments to continue the recent growth.

Another source described the situation in more dire terms, even saying the walls are crumbling in on Veritas and that they have to negotiate.

I have been told by multiple sources that these negotiations should not lead to any changes in management or force any layoffs, and that all parties have faith in the current management team and plan. Dahlgren described that from an operational standpoint, this is business as usual while efforts are made to fix the balance sheet.

What the parties cannot do, however, is nothing. An interest payment has been missed, and the clock is ticking - I believe this must be resolved by early summer based on similar restructurings and what I have heard from sources. Not solving the problem could devastate the company’s ability to maintain customer and continue providing the same level of services.

What Happens

If these negotiations are successful, such that Veritas, the lenders, and Anthology all agree on a restructuring that lowers debt in exchange for equity and acceptance of a valuation drop, then the result will be good for Anthology and its customers. There will be noise and reputational risk, but Anthology will be in a much more sustainable situation.

If the negotiations are unsuccessful or highly contentious, then Anthology’s retention problems will get worse. Client losses will accelerate, and Anthology will over time be further limited in its investment in product improvements.

Anthology provided the following written statement by email.

All of this timing points to full clarity just before the Anthology Together 25 users conference in July. We will keep our eyes open before then, but expect significant updates by this summer.

Stay tuned.

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1  We have noted the generative AI additions to both Blackboard LMS and Anthology Student.