Anthology's Owner Might Walk Away

Was this forwarded to you by a friend? Sign up, and get your own copy of the news that matters sent to your inbox every week. Sign up for the On EdTech newsletter. Interested in additional analysis? Try with our 30-day free trial and Upgrade to the On EdTech+ newsletter.

In late January I described Anthology (owner of Blackboard LMS and Anthology SIS / CRM platforms) and its struggle to manage its debt. In that post I described the assumptions behind the negotiations between Veritas (primary owner), the primary debt holders, and Anthology management to lower the total debt in exchange for equity for lenders [emphasis added].

Based on my interviews with multiple inside sources, I believe the answer to that question is becoming much more clear. Veritas, the primary Private Equity (PE) owner of Anthology, appears likely to walk away and hand over its equity to the debt holders. It appears that there is no major disagreement among the parties involved, meaning that the issue may be handled without going to court (and therefore not technically handled as bankruptcy protection). But the debt holders appear headed to take over the company, with the deal still to be finalized sometime this summer.

There is an important question to address. If debt holders completely take over the company, will Anthology be broken up and quickly sold or will the current broad-portfolio strategy of Anthology be preserved?

Why Is This Even Being Considered?

Veritas is the primary owner of Anthology, and the company has just under $1.5 billion in debt. Why is Veritas walking away even an option - isn’t something better than nothing?

It is important to realize that Veritas has already added additional capital beyond the 2021 acquisition, as I noted in January.

As noted by S&P Global Ratings in March, the turnaround is not complete [emphasis in original].

What this means is that there is no guarantee that Veritas would not have to recapitalize again or completely avoid default. Therefore one obvious choice is for Veritas to cut its losses and move on.

The Question of Increasing Importance

If Veritas Capital decided to remain as one of the primary owners, the most likely strategy would be to continue the turnaround efforts with Anthology intact, with that approach buoyed by the cleaner balance sheet and lower debt levels. But assuming my information is correct, there is a new question that remains to be answered. Will the debt holders / future owners sell off parts of the company to cover debt losses or will they continue the turnaround effort as is?

Typically debt-holding investment firms do not like to own the equity of companies beyond the bare minimum of time. However, by the very nature of most corporate debt where a lien is secured by the borrowing company’s equity, these investment firms do become owners when the company does not meet its obligations. But in these cases, debt holders are most likely to seek a path to pay off losses and get rid of ownership as soon as is feasible. This would be the argument that could lead to a sell off of Blackboard or Anthology Student or Anthology CRM or some other holdings, ideally getting rid of all of them.

There is a twist, however, based on a class of investors who specialize in distressed debt. There are companies that seek to buy debt that is high risk, with a reasonable likelihood of a default and this debt turning into equity. These companies are often seeking to buy a company for a bargain price based on timing the debt purchase. And one of the strategies that could be in play is for a distressed debt investor using Anthology’s debt problems to get the company and continue the turnaround plans, but now with lower debt levels and with a low “purchase” price.

I have heard that there is an increased level of distressed debt investment in Anthology’s case, but I do not have a clear answer on this question. If there are indeed new players involved, we may see something similar with Anthology to 2U’s bankruptcy, where the debt holders took ownership (in that case through the courts and a prepackaged bankruptcy) and continued the turnaround strategy.

This is the big question to watch between now and July.

Summary

What I am hearing from all sources with a relatively high confidence level:

• To date the negotiations are amiable with no major disputes that would cause a difficult bankruptcy fight. Whether this situation is resolved outside of court or not, the change in ownership would be prepackaged.

• In all scenarios, Anthology would come out of this capital restructure with significantly lower debt levels, perhaps even less than $100 million.

• There is a general interest among the negotiating parties to resolve this situation out of court and avoid formal bankruptcy and the stigma and cost of that scenario.

What I am hearing from multiple but not all sources and therefore with a somewhat lower confidence level:

• Veritas Capital is most likely to walk away rather than negotiate for partial equity write down and a smaller ownership stake. Even if my information is solid, I will note that final decisions have not been made.

• There are distressed debt investors with increasing ability to drive the final negotiations and corporate strategy. If Veritas walks away but the new owners maintain the current strategy, it is likely from this change in debt ownership. I have heard this from multiple sources but cannot verify from any official listings.

• The timeline is headed towards resolution just before Anthology Together in mid July. But this timing could change based on changing needs for due diligence.

In an interview with CEO Bruce Dahlgren for this story, he emphasized that nothing has changed in the company strategy to date, including both the power of having a broader portfolio company (LMS + SIS + CRM) and the investments in generative AI. As Dahlgren noted, the pace of AI integrating into education is fast and supports this strategy.

As for the question of whether Veritas will walk away or not, Dahlgren said that he didn’t know the answer and that the formal decisions have not been finalized. He agreed with my characterization that the relationships between parties are positive, both in terms of company operations and debt negotiations.

Furthermore, Anthology also provided the following statement.

Stay tuned as we follow these negotiations as well as our coverage of the July users conference.

The main On EdTech newsletter is free to share in part or in whole. All we ask is attribution.

Thanks for being a subscriber.