TPG Pace Tech Opportunities (NYSE:PACE) has entered a definitive agreement to combine with remote learning platform Nerdy giving it an enterprise value of $1.4 billion.

Nerdy provides a personalized learning platform offering live classes as well as one-on-one tutoring for students ranging to professionals and graduate-level to kindergarten.

The combined entity is expected to trade under the symbol “NRDY” upon the transaction’s close in the second quarter of 2021.

Transaction Overview

TPG Pace is financing the deal with the $450 million in its current trust along with forward purchase agreements (FPA) amounting to $150 million. A further $150 million in the deal comes from a PIPE priced at $10 per share, which drew institutional investors Franklin Templeton, Healthcare of Ontario Pension Plan, Koch Industries and Learn Capital.

Nerdy expects to add about $266 million in cash to its balance sheet through the deal after paying out $388 million to shareholders and paying off $41 million in debt. TPG Pace must maintain at least $250 million in cash available in order for the deal to close.

Existing Nerdy shareholders expect to own about 51% of the combined entity with TPG Pace shareholders taking 26%. The remaining equity is to be split with FPA and PIPE investors each taking 9% and TPG Pace’s sponsor taking 5%.

TPG Pace’s sponsor has agreed to forfeit 2,000,000 (22.8%) founder shares and 2,444,444 (40.7%) warrants. Another 4,000,000 (45.7%) founder shares will now be subject to an earn out, vesting in thirds as the combined entity trades at or above $12, $14 and then $16 for 20 of 30 trading days within five years of the deal’s close.

This earnout structure is mirrored on the Nerdy side, with 4,000,000 shares to be disbursed to company shareholders according to the same schedule.

Nerdy founder Chairman and CEO Chuck Cohn is expected to remain the company’s single largest shareholder and existing management is expected to continue to lead the combined company.

Quick Takes: Four new SPACs have listed in the past 49 days with a declared focus on education or education technology, but Nerdy marks the year’s first deal in the space.

Churchill Capital Corp. II (NYSE:CCX) is working to close its own $1.3Bn combination with remote education platforms Skillsoft and Global Knowledge Learning. Its shares closed trading yesterday at $10.26, indicating the sector is not one the market is necessarily guaranteed to appreciate like electric vehicles.

But, Nerdy’s value is in combining the front end of a remote learning platform with the back end of gig economy workforce. Tutors and teachers on the platform work on average less than five hours a week and use it to supplement other income.

Most are active or retired teachers alongside graduate-level students and professionals who also provide instruction in their areas of expertise. This well of gig teachers isn’t likely to dry up soon as over 900,000 have applied to work on the platform since 2012.

On the financial side, Nerdy obviously benefits from its contract-only workforce, but the broad base of part-time instructors also allows it to use personalization features to better match students and teachers based on personality type and learning style preferences.

Its business model also does not depend on pre-recorded or live mass-taught courses, that have become increasingly commoditized in the internet age. Instead, Nerdy has such offerings, but gives access to them for free while cross-selling this user base on small group classes and one-on-one tutoring four hourly rates ranging from $10 to $75.

About 87,000 users are currently paying for these premium classes while 500,000 have engaged with its free learning content. With this large pool of potential paying customers at hand, Nerdy’s services pay back their customer acquisition costs (CAC) and are profitable on each user’s first purchase.

While Nerdy’s numbers understandably went up in 2020, it actually was growing even faster before the pandemic. Its revenues grew 26% year-on-year in 2019, while its user base grew by 34%. Nerdy projects it can achieve revenue growth at a CAGR of 45% through 2023.

It expects to finish the final accounting of 2020E with $106 million in revenue on which it will take a $23 million net loss. Nerdy expects to have its first EBITDA-positive year in 2023, attributable mostly to its sales and marketing expenses holding steady at about 41% of total revenue while other expenses flatten out.

TPG Pace values Nerdy at 13.2x its 2020E revenue or 10.1x 2021E revenue. This makes for a nice discount to its closest remote learning peer Chegg (NYSE:CHGG) which trades at 21.8x revenue.

But, Nerdy’s gig economy model gives it similar gross margins to other such players like Fiverr (NYSE:FVRR), Airbnb (NASDAQ:ABNB) and DoorDash (NYSE:DASH). These trade far hotter, with Airbnb and DoorDash each moving at about 28x revenue today, while Nerdy’s arguably closest comp in the cohort, Fiverr, trades at 51.1x revenue.

Click here for the full investor presentation.

ADVISORS

• Goldman Sachs & Co. LLC acted as exclusive financial advisor to Nerdy.
• Goodwin Procter LLP acted as the legal advisor to Nerdy.
• Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, Barclays Capital Inc. and TPG Capital BD, LLC acted as financial advisors, capital markets advisors and PIPE placement agents to TPG Pace Tech Opportunities.
• Vinson & Elkins L.L.P. acted as the legal advisor to TPG Pace Tech Opportunities.