Instructure IPO: It’s debt management, not a company flip

While the 2U acquisition of edX stepped on the news of Instructure filing for its second initial public offering (IPO), there have been a lot of questions about what this move means for the company, particularly coming from Canvas LMS clients. Today Instructure filed an amended propectus that clarified quite a bit on what this IPO is all about. 1 The short answer – this is not a case of Thoma Bravo (private equity firm that acquired Instructure last year off the public market) flipping the company after a quick pandemic boost; rather, this is a move by Bravo to manage the debt the company took on as part of the purchase.

Thoma Bravo will still own the vast majority of shares in Instructure after this IPO, using a complex system of holding companies, stock splits, and dilutions plans. The actual public offering is roughly 12.5 million shares expected to price in the $19 – $21 per share range, leading to an estimated raise of $250 million. Those offered shares are a small part of the total shares, however, and Bravo will retain the rest.

Immediately after this offering, assuming an offering size as set forth above, funds controlled by our principal stockholder, Thoma Bravo, will own approximately 88.1% of our outstanding common stock (or 87.0% of our outstanding common stock if the underwriters’ over-allotment option is exercised in full). As a result, we expect to be a “controlled company” within the meaning of the corporate governance standards of NYSE.

The “controlled company” status is important. When companies have an IPO, they only float a portion of the company. In this case with Instructure, the issue is that one entity – Thoma Bravo – will control such a large percentage of the company’s voting shares. It is a combination of offering just 12.5 million shares of its common stock and having Bravo own the rest that is worth noting.

The Use of Proceeds section of the prospectus is singularly focused on debt management, with actual forecast amounts now thrown in. tl;dr – Instructure plans to use $228m of the $250m raised to pay down portions of its $775m term loan at an 8.0% interest rate. If the offering is oversubscribed, those numbers would change to $263m out of $287.5m raised, based on share price estimates.

We estimate that our net proceeds from this offering will be approximately $228.1 million (or approximately $263.0 million if the underwriters’ over-allotment option is exercised in full), assuming an initial public offering price of $20.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to reduce our indebtedness, increase our capitalization and financial flexibility, create a public market for our common stock and enable access to the public equity markets for us and our stockholders. We expect to use approximately $228.1 million of the net proceeds of this offering to repay $224.7 million of outstanding borrowings under our Credit Facilities (or $263.0 million if the underwriters exercise their option to purchase additional shares in full to repay $259.1 million of outstanding borrowings under our Credit Facilities), net of fees incurred in conjunction with the Applicable Prepayment Premium, as more fully described in the Credit Agreement.

On March 24, 2020, we entered into our $825.0 million Credit Agreement with a syndicate of lenders, comprised of the $775.0 million Initial Term Loan and the $50.0 million Revolving Credit Facility. On December 22, 2020, we supplemented the Initial Term Loan with a $70.0 million Incremental Term Loan. As of March 31, 2021 and December 31, 2020, we had $789.6 million and $839.2 million, respectively, outstanding under our Term Loan. As of March 31, 2021 and December 31, 2020, respectively, the interest rate on our Term Loan was 8.0%. As of March 31, 2021 and December 31, 2020, respectively, we did not have any borrowings outstanding under the Revolving Credit Facility. The Term Loan matures on March 24, 2026. Borrowings under the Revolving Credit Facility mature on March 24, 2026.

Since nothing is straightforward in corporate finance anymore, Thoma Bravo affiliates own a significant portion of that debt, meaning that roughly 1/6 of the proceeds will be paid to Bravo.

In connection with our entry into our Credit Facilities on March 24, 2020, affiliates of Thoma Bravo collectively acquired $129.2 million of our term loans under our Term Loan and as of March 31, 2021, affiliates of Thoma Bravo collectively owned $131.6 million of our Term Loan. As a result, Thoma Bravo will receive a portion of the net proceeds of this offering in connection with the repayment of our Term Loan. Based upon our estimated receipt of net proceeds from this offering of approximately $228.1 million (or $263.0 million if the underwriters exercise their option to purchase additional shares in full) as described above, we expect that Thoma Bravo will receive $38.0 million of the total $228.1 million (or $43.8 million of the total $263.0 million if the underwriters exercise their option to purchase additional shares in full) of such net proceeds used to repay outstanding borrowings under our Term Loan.

There’s still more to learn from this IPO, but don’t look on this as a major change in strategy or a flip of the company. Thoma Bravo will remain in control for now, but public shares will be used to reduce the company’s debt burden. The share prices from public markets will set a company valuation that could impact Instructure’s finances in the future, as well as further define market valuations for other EdTech companies , but operationally this IPO should not change much for the company.

I’ll look deeper to see if there are other insights into the LMS market and Instructure’s future plans. Stay tuned.

For what it’s worth, Bloomberg describes the total market valuation for Instructure as “nearly $3 billion.”

Update: Added clarification on controlled company status and added link to Bloomberg article.

Disclosure: Instructure and several of its LMS competitors are subscribers to the MindWires Market Analysis service.

1 The basics were there in the initial filing, but the actual percentages and prices are now filled in.