💥Chegg-ed Out💥
Plus: Mitel Networks Inc. and Cumulus Media Inc.
Chegg, Inc. ($CHGG) (“Chegg”) is a Santa Clara, CA-based edtech company that sells monthly subscriptions to its platform full of learning resources aimed at college students — primarily those in STEM and business courses. These learning resources include step-by-step solutions to homework problems, practice questions, and flashcards, as well as online writing tools (e.g., proofreading, plagiarism checking, generating citations).
Chegg took off during the COVID-19 pandemic as schools across the country went online; it even reached that coveted Silicon Valley milestone of becoming a verb back in ‘21. Per Forbes:
“It’s called “chegging.” College students everywhere know what it means. “If I run out of time or I’m having problems on homework or an online quiz,” says Matt, a 19-year-old sophomore at Arizona State, “I can chegg it.”
He means he can use Chegg Study, the $14.95-a-month service he buys from Chegg, a tech company whose stock price has more than tripled during the pandemic. It takes him seconds to look up answers in Chegg’s database of 46 million textbook and exam problems and turn them in as his own. In other words, to cheat.”Subscribers can submit questions to Chegg’s online platform and receive step-by-step answers in real time, 24/7, through a combination of generative AI, a database of over 100mm existing Q&As, and human subject matter experts. Ask a question, get a fully broken down “show your work” solution from the existing database or from an expert in under 30 minutes. The company calls this “homework solutions” and “quiz & exam help,” while others like Casey Newton label it “academic dishonesty at a scale that was previously unheard of.”
When Johnny asked his math major cousin if he had heard of Chegg, “cousin” said, “Ya! They help people cheat.”
LOL, what a reputation!
The shift to online schooling during the pandemic was a boon to Chegg. FY’20 Revenue increased 57% YOY to $644mm, Adj. EBITDA increased 66% to $207mm, and Annual Subscribers increased 67% to 6.6mm.* Revenue and Adj. EBITDA peaked in FY’21 at $767mm and $266mm, respectively, but have been declining since. Like, badly ⬇️:
The end of the pandemic is one thing. Artificial intelligence is quite another. Chegg has been hit particularly hard by competition from ChatGPT. In May ‘23, then-CEO Dan Rosensweig first called out the negative impact from ChatGPT on Chegg’s business:
“In the first part of the year, we saw no noticeable impact from ChatGPT on our new account growth and we were meeting expectations on new sign-ups. However, since March we saw a significant spike in student interest in ChatGPT. We now believe it’s having an impact on our new customer growth rate.”
The stock dropped 51% that day to $9.25/share.
It never recovered.
Ultimately, Chegg lost half a million annual subs in FY’23. In June ‘24, Chegg started cutting costs, laying off 441 employees (23% of the company) and closing two offices for an estimated cost savings of $40-50mm.
But the AI onslaught continued and the cuts proved insufficient. On top of competition from tools like ChatGPT, the company has been negatively impacted by Google’s AI Overview feature, which was rolled out broadly in August ‘24. After seeing the impact of Google’s AI Overview, Chegg announced a second round of layoffs in November ‘24, letting an additional 319 people go. The two rounds of layoffs shrank the company by approximately 40%** and is expected to save $100-120mm combined in FY’25.
The company had no choice; it, too, has adopted AI into its business, highlighting that AI reduces the cost per solution by 70%. It seems some users aren’t happy with Chegg’s new AI approach though, with a few even inputting complaints into Chegg’s Q&A about … well … the Chegg Q&A.
Meanwhile subs continue to decline in the face of these multifaceted AI headwinds.
Google’s AI Overview feature, in particular, hurts Chegg by keeping would-be customers seeking answers to homework questions within Google search rather than leading them to Chegg’s site. Global non-subscriber traffic to Chegg’s site declined 8% in 2Q’24, 19% in 3Q’24, and 39% in Q4’24. In January ‘25, non-sub traffic was down a whopping 49%. Google is strangling Chegg.
On its February 24, 2025 earnings call, Chegg announced that it was (i) suing Google for its AI Overview practices, alleging antitrust violations in addition to asserting unjust enrichment claims, and (ii) retaining Goldman Sachs Group Inc. ($GS) to review strategic alternatives.
Over on GenZ Reddit, the youths have already declared Chegg is dead:
Chegg has $359mm of 0.125% convertible senior notes due March 15, 2025 (the “‘25 converts”), which are pricing around par, indicating that investors expect to be repaid in full. Yes, we also checked the calendar after reading that.
The company has $63mm (pro forma for recent transactions discussed below) of 0% convertible senior notes due September 1, 2026 (the “‘26 converts”), which it has been buying back at a discount. In a March 5, 2025 8-K, the company announced that it had arranged to repurchase $65.2mm face of the '26 converts for $57.4mm, closing March 7, 2025. The ‘26 converts are now trading at 80, below the 88 weighted average repurchase price, 🤔🙄.
Chegg ended the year with cash and cash equivalents of $528mm, sufficient to cover the recent repurchases of the ‘26 converts and retirement of the ‘25 converts. Accounting for both, the company will have a pro forma (12/31/24) cash balance of $111mm, which the company hopes is sufficient liquidity to carry them through. To what is anyone’s guess, 🤷♀️.
With all this overhang, the stock is down 99% from its ‘21 peak …
… and has closed below $1/share for the last six trading days.
Man. Make the bad news stop. Given how awful things look, we just couldn’t help ourselves:
“That said, they’re not completely ‘f*cked.’” LOL!
It appears ChatGPT has more faith in this 💩’s management than we do.
*Annual Subscribers tracks unique subscribers over the course of the year, while Quarterly Subscribers tracks unique subscribers each quarter and thus is much lower. Given roughly one quarter of the college population leaves Chegg’s target demographic each year, churn should be relatively higher than other subscription services, even on a good day.
**There’s a discrepancy between the company’s various filings on the percentage of the workforce fired in ‘24. The June 17, 2024 8-K stated that Chegg would let 441 people or 23% of the company go (implying a workforce of 1,917 people before and 1,476 after). The November 12, 2024 8-K said that another 319 people or 21% of the current workforce were let go in the second round of layoffs (implying a workforce of 1,519 before and 1,200 after). The February 24, 2025 10-K stated that the company had laid off 760 people (foots with 441+319), but that this represented 22% of the workforce (implying a workforce of 3,454 before and 2,694 after). The 10-K states elsewhere that Chegg had 1,271 employees as of 12/31/24. Based on this, we are assuming that the 22% figure in the 10-K is incorrect and that the 760 people fired represent approximately 40% of Chegg’s pre-layoff workforce (760 laid off in ‘24 divided by 1,917 implied workforce prior to June ‘24 layoff). But, whatever. Whether they’re math is wrong or ours is, the company is straight-up screwed.
💥Another Failed Liability Management Exercise (Mitel).💥
On March 9 and 10, 2025, Searchlight Capital Partners L.P. (“Searchlight”)-owned Mitel Networks, Inc. (“Mitel”) and 15 affiliates (collectively, together with Mitel, the “debtors,” and together with their non-debtor affiliates, the “company”) filed prepackaged chapter 11 bankruptcy cases in the Southern District of Texas (Judge Lopez).*
You may recall these guys scored a New Year’s Eve win in the New York Supreme Court's First Appellate Division, which upheld this beast of a liability management transaction (the “LME”).
We noted it in passing here and covered the complaint here, so we’ll try not to retread old ground. All said, 👏 congrats on that “victory”! 👏
Truthfully, if it wasn’t for this name circling around the bankruptcy bin for years now, we would have zero clue whatsoever who they are and what they do. CFO Janice Yetter, however, seems to assume brand recognition in her first day declaration. After all, the company is a “global,” “leading,” and “award-winning” — the holy trifecta! — provider of on-site, cloud, and hybrid video, telephony, and messaging services and, of course, related subscriptions, which it doles out to customers in 146 countries. In ‘24, the business generated ~$907mm in revenue, across 3 lines: (i) “unified communications” (“UC”) products and subscriptions, (ii) consulting and professional services, and (iii) good ol’ fashioned physical phones and accessories.**
And thanks to that LME, it has a gnarly prepetition cap stack:
Holy heck, they one-upped Robertshaw’s absolute monstrosity! Five of those nine tranches — the gray boxes — resulted from the LME, and the two ABL loans are the product of an even more recent BTG Pactual U.S. Private Investments L.P (“BTG”)-provided loan in May ‘24. In other words, of all that debt, only those depressing legacy loans at the bottom existed before the October ‘22 LME.
The company blames the usual suspects for its downfall, including COVID, which “reduc[ed] the need for certain of the Company’s communications products and services that were primarily developed for an in-office environment,” supply chains, constrained manufacturing, and inflation …
… before pivoting to former “strategic”*** and COVID-cuffing-partner RingCentral, Inc. (“RingCentral”). Those two cozied up in the fall of ‘21 following that☝️ reduced demand, and the intention had been to provide a path for the company’s customers to upgrade from on-site infrastructure to RingCentral’s sleek, sexy, and modern cloud-based communications platforms — an obvious move when everyone’s working remotely. Pour one out for that setup.
The partnership, however, wasn’t meant to be. True to COVID-couple-form, they started bickering about when and if incremental payments would become owing to the company, which the company alleges led to a liquidity crunch and necessitated the LME.
Speaking of which, that was a roaring success by any measure: it bought a bit more than … a year, during which the company acquired fellow UC-business Unify, Inc. from the French-based Atos group in early October ‘23, broadening the company’s EMEA reach.
But by early ‘24, it was back to the drawing board to explore more “strategic alternatives and potential liquidity-enhancing transactions” with the aid of independent director Julian Nemirovsky, Paul, Weiss, Rifkind, Wharton & Garrison LLP (Paul Basta, John Weber, Sean Mitchell, Leslie Liberman), PJT Partners LP ($PJT) (Michael Schlappig), and FTI Consulting, Inc. ($FCN) (“FTI”)(!!!). Fellas, we asked you to give us a heads-up!
That led to the aforementioned May ‘24 ABLs, and in June ‘24, the company broke it off with RingCentral, which netted the company a cool $30mm of incremental liquidity and got it out from under RingCentral’s exclusivity provisions. After a Brat Summer, the company found a new beau in the form of Zoom Communications, Inc. ($ZM)(“Zoom”), and they agreed to, more or less, bundle the company’s single-interface communications platform with Zoom. After all those deals closed, the debtors brought on Andrew Kidd as a second independent director for good measure in October ‘24. How’d that all work out?
We give you, verbatim, Ms. Yetter:
“[E]ach of the ABL Facility Transaction, the 2024 RingCentral Transaction, and the Zoom Transaction was value accretive—enabling the Company to service its debt in the near term and best position the Company’s business for the future by expanding its market reach in telecommunications, specifically in the hybrid communications segment. Notwithstanding these initiatives, by November 2024, the Company determined that it would not be able to pursue a refinancing of its existing funded indebtedness and would not be able to service its existing interest expense beyond the first quarter of 2025.”Value accretive indeed! Honestly, the chutzpah it takes to put those two sentences back-to-back — that was only two months after the Zoom deal signed! Did future debt service just sneak up on you?!
Starting in November ‘24, the company engaged with an ad hoc group of senior lenders (i.e., the new money and uptiered loans from ‘22)(the “ad hoc group”). A month later, in December ‘24, it skipped out on a junior loan interest payment and entered into a forbearance agreement with the ad hoc group, which, through extensions, brought everyone to the petition date.
During that time, the company, the ad hoc group, those litigious junior lenders, BTG, as well as “certain” holders of priority lien loans, got into a room together and (quite impressively) negotiated a fully-buttoned-up restructuring support agreement (“RSA”), which has the support of 100% of the ABL loans, 72.1% of the priority lien claims, and “over” 81.1% of the non-priority lien term loan deficiency claims (i.e., the 2L, 3L, and legacy term loans) (the “non-priority lien claims”). You, uh, don’t see that in every LME-turned-bankruptcy. It culminates in a chapter 11 plan, which the debtors began soliciting right before the petition date. Here’s what the RSA and plan entail:****
📍DIP Financing. A headline $131mm DIP term loan, composed of (i) $69mm (all available on interim) in new money, inclusive of a 3% PIK upfront fee and a 12% PIK backstop fee, and (ii) an interim-approved $62mm roll-up of the prepetition priority lien term loans.
The DIP carries a cash-pay interest rate of SOFR + 8% or ABR + 7%.
📍Exit Financing. A fully-backstopped new money $20mm term loan (the “tranche A-1 TL”) and $120mm term loan (the “tranche A-2 TL”), the latter of which is (i) a conversion of the $69mm (😎) in DIP new money term loans and (ii) ~$51mm in incremental new money term loans, inclusive of fees. What do we call the exit fees? Hmm, let’s go with “robust”:
The lenders that backstop the tranche A-1 TLs will receive a 10% backstop fee paid in reorg equity, subject to dilution by any post-effective date management incentive plan (the “MIP”),
The lenders that backstop the new money tranche A-2 TLs will receive a 15% backstop fee paid in additional tranche A-2 TLs (~$6.7mm), and
The lenders that actually fund the tranche A-2 TLs – regardless of backstop status – will receive a fee equal to 30.4% of the reorg equity, subject to dilution by the MIP.
📍Equitization of DIP Roll-Up Claims. DIP roll-up term loans will receive 44.6% of the reorg equity under the plan, subject to dilution by the MIP.
📍Equitization of Priority Lien Claims and Non-Priority Lien Claims. Subject to a literal ton of dilution by the DIP equitization, those backstop and funding fees ☝️, and, of course, the MIP, priority lien claims and non-priority lien claims will be equitized and receive 66.7% and 33.3%, respectively, of the reorg equity.
📍Reinstatement of ABL Loans; Treatment of GUCs and Existing Equity. The plan reinstates the ABL loans and waives change of control rights triggered by the restructuring. Similarly, GUCs are passing through the bankruptcy unimpaired. Last and definitely least, existing equity is also getting reinstated. LOL, JK, you saw they’re equitizing part of the DIP, right? Searchlight’s equity is toast.
📍LME Settlement. To settle the ongoing LME litigation and drama, the debtors will pay $1.25mm in cash and issue $3.75mm in incremental tranche A-2 TLs to consenting junior lenders, which’ll help make up for the fees they paid to their counsel, Selendy Gay PLLC (Jennifer Selendy, Kelley Cornish, and David Coon). Guess they read that NYE opinion like the rest of us.
📍Milestones. It’s a prepack, so what do you think? These guys are getting in, and they are getting out. Here are the big milestones: no later than (i) April 18, 2025, the court must enter the final DIP order, (ii) April 23, 2025, the court must enter the confirmation order, and (iii) May 23, 2025, the plan must go effective. All in, that’s 75 days from filing to exit.
Quite the package. It shouldn’t surprise you that the first day hearing was about as quiet as it gets – it took the court a little over an hour to approve all relief, including conditional approval of the debtors’ disclosure statement (“DS”). Folks will mosey on down to Houston for a second day hearing on April 4, 2025 and a combined hearing on April 17, 2025.
The debtors are represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP (Paul Basta, John Weber, Sean Mitchell, Leslie Liberman, Shafaq Hasan, Martin Salvucci, Luxiang Wang, Dolan Bortner, Douglas Keeton, Andrew Ehrlich, Paul Paterson) and Porter Hedges LLP (John Higgins, Eric English, M. Shane Johnson, James Keefe, Jack Eiband) as US legal counsel, Goodmans LLP, as Canadian legal counsel, FTI (Paul Stroup, Heath Gray, Jacobson McKay, Paul Egloff, Graham Doll, James Goodyear) as financial advisor, PJT (Michael Schlappig) as investment banker. The ad hoc group is represented by Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen, Elliot Moskowitz, Michael Pera, Katharine Somers) and Kane Russell Coleman Logan P.C. (Mark Taylor) as legal counsel and Perella Weinberg Partners LP ($PWP) as financial advisor. Searchlight is represented by Latham & Watkins LLP (Christopher Harris, George Klidonas). The junior lenders are represented by Selendy Gay PLLC (Jennifer Selendy, Kelley Cornish, and David Coon). BTG is represented by Riemer Braunstein LLP (Donald Rothman, Lyle Stein) and Frost Brown Todd LLP (Rebecca Matthews, Joy Kleisinger). Wilmington Savings Fund Society, FSB ($WSFS), as the 1L, 2L, and 3L priority lien term loan administrative agent, is represented by ArentFox Schiff LLP (Brett Goodman, Jeffrey Gleit, Matthew Bentley). Ankura Trust Company, LLC, as the junior loan admin agent, is represented by Cadwalader, Wickersham & Taft LLP (Douglas Mintz, Thomas Curtin, Raymond Navaro). Acquiom Agency Services LLC and Seaport Loan Products LLC, as co-DIP agents, are represented by McDermott Will & Emery LLP (Jonathan Levine, Lucas Barrett).
*Canuck entity, Mitel Networks Corporation, also filed a proceeding under Part IV of the Companies’ Creditors Arrangement Act in the Superior Court of Justice (Commercial List) in Toronto.
**Communications products and subscriptions generated ~$426mm (43% of all revenue), consulting and professional services generated $276mm (28%), and hardware generated $205mm (20%).
***Lots of “strategy” over there at Mitel. A whopping 21 variations of the word show up in Ms. Yetter’s declaration.
****There’s also an opt-out release, so cue up a US trustee objection again.
⚡Update: Cumulus Media Inc. ($CMLS)⚡
Damn it Cumulus Media Inc. ($CMLS), you just won’t let us quit you, will you?
It’s been about 18 months since we first looked at the formerly bankrupt telecom company …
…and almost 12 months since we revisited it with an update:
We’ve subsequently kept an eye on its situation but never quite felt compelled to dip our toes back in those cloudy waters (see what we did there?). Sadly, however, it’s gotten too darn hard to ignore any longer.
Why, you ask? Oh, well, we don’t know, maybe because of this👇:
For reference, the stock was at $4.82/share when we initiated on the name back in November ‘23.
So let’s get caught up a little. First, you’ll recall from our previous coverage that in February ‘24, CMLS offered holders of its 6.75% senior secured first-lien notes due ‘26 (the “Old Notes”) the opportunity to exchange their holdings for new 8.75% senior secured first-lien notes due ‘29 (the “New Notes”). Per the initial offer, participants would receive $770 in New Notes for every $1,000 of Old Notes tendered. The exchange also contained a trigger that shifted collateral from the Old Notes to the New Notes, meaning any holdouts were getting f*cked.
But that 23% discount was too much for the participating lenders to swallow so they rallied together with Gibson Dunn & Crutcher LLP and negotiated better terms that upped the principal received on the New Notes to $940 (albeit at a lower 8% interest rate).
Those new terms did the trick and the company announced the final results of the exchange offer on May 2, 2024. ~$325.7mm of the Old Notes participated (94% of outstanding principal), which didn’t quite reach the minimum participation condition of 95% but CMLS looked past the 1% difference and waived the stipulation.* Contemporaneously, CMLS also consummated a term loan exchange where the old term loan was replaced with new five year paper. 99.6% of the old term loan participated in that exchange. All in all, CMLS reduced its debt by $33mm and extended its maturities from ‘26 to ‘29.
In January ‘23, CMLS also learned that Singapore-based Renew Group Private Ltd. (“Renew Group”), planned to attempt a hostile takeover. Management was less than enthused, gave Renew Group the good ol’ …
… and promptly implemented a poison pill. CMLS later chose not to extend the poison pill and it expired on February 26, 2025. This apparently prompted rumors of a possible merger between another recently-bankruptcy telecom, Audacy, Inc., with CMLS since the man behind Renew Group, Manoj Bhargava, is also a large shareholder in Audacy. Homeboy apparently has a hard-on for busted telecom companies!
Synergies with another radio company that just emerged from bankruptcy last year? Good luck, Mr. Bhargava, this, on just the CMLS side, is what you’re going to have to contend with:
CMLS reported FY’24 earnings on February 27, 2025 and … well … you can see how that went over with the market:
Needless to say, the report wasn’t pretty. For FY’24, the company announced total revenue of $827.1mm (a 2.1% YoY decline), adjusted EBITDA of 82.7mm (a 8.8% YoY decline), and a net loss of $283.3mm.
Ok, yeah, sure, the company (sorta) recently completed an LME transaction that, among other things, captured debt discount and kicked out maturities but it still left itself with $671.6mm of funded debt and now sits on just under $64mm of cash. Go ahead. We’ll wait. You can take all of these figures and run some pretty gnarley ratios if you feel like it. The ratings agencies sure felt like it: both Moody’s and S&P Ratings have the company sitting comfortably in junk territory. Similarly the market has taken it all in. As of March 3, 2025, the New Notes were pricing at 35c on the dollar. The new term loan wasn’t faring any better at ~38c on the dollar.
We often hear about companies that have undertaken LME deals being primetime candidates for more potential restructuring down the road. You know, kind of like Mitel ⬆️. Given the secular decline of legacy media and the fact that FCF has gone into the red, the need for this radio operator to right the ship is critical. Absent perfect execution and some innovation, this sucker’s debt looks like it’ll be awfully challenging to refi when the time comes.
Something tells us you can predict what headline we’ll use “when the time comes.”
*CMLS ended up reporting that there was a 97% participation rate in their 1Q’24 press release.
📈Chart of the (Mid)Week📈
📢 Calling Women RX Lawyers📢
The National Association of Women Lawyers (NAWL) was founded in 1899. Its mission is the advancement of women in the legal profession and the equality of women under the law. Women restructuring lawyers are invited to join the NAWL Bankruptcy & Restructuring Group for networking, substantive programming, entertainment, or advocacy. Last year’s programs included a healthcare restructuring panel and a bankruptcy book club discussion (Going Infinite: The Rise and Fall of a New Tycoon by Michael Lewis), among others. We are a resource for new and seasoned bankruptcy law attorneys. Lawyers from sponsor firms join for free.
📚Resources📚
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
📤 Notice📤
Andrew Breland (Associate) joined Pallas Partners US LLP from Kasowitz Benson Torres LLP.
Douglas Mintz (Partner) joined Cadwalader from Schulte Roth & Zabel.
Eric Einhorn (Associate) joined Latham & Watkins LLP from Weil.
Jill Forster (Partner) joined Pallas Partners US LLP from Kasowitz Benson Torres LLP.
Michael Hanin (Partner) joined Pallas Partners US LLP from Kasowitz Benson Torres LLP.
Richard Mizak (Interim Management Consultant) joined Riveron Consulting from Accordion.
Scott Graves founded Los Angeles-based Lane42 Investment Partners and will serve as CEO and CIO, moving on from Ares Management Corporation.
🍾Congratulations to…🍾
Cole Schotz PC (Justin Alberto, Andrew Cole, Elazar Kosman, H.C. Jones III) for securing the legal mandate on behalf of the official committee of unsecured creditors in the Omega Therapeutics Inc. chapter 11 bankruptcy case.
Erin Broderick on her promotion to Partner-in-Charge at Eversheds Sutherland US LLP’s Chicago office.
Genesis Capital Partners LLC (Edward Kim) for securing the financial advisor mandate on behalf of the official committee of unsecured creditors in the iM3NY chapter 11 bankruptcy cases.
Jed Donaldson on being promoted to Partner at Woods Rogers Vandeventer Black PLC.
Ronit Berkovich on being named co-head of Weil’s restructuring department. We’ll go ahead and retire one of our top memes of ‘25 now (IYKYK, 😉).