November 16, 2012 8:59 pm

Postsecondary education M&A creeping back - Analysis

This article is provided to readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals.

Acquisitions of for-profit postsecondary schools are picking up and the trend could continue now that the presidential election is over, industry sources told mergermarket.

M&A for other education companies, such as non-accredited schools, online providers and corporate training institutes, has also heated up since September, which saw only three education acquisitions, according to mergermarket data: Emcert was acquired by; Weld North acquired Editure Professional Development and JBHM Education Group and LLR invested in Orbis Education.

But activity picked up in October, with a flurry of private equity firms buying education companies: The Wicks Companies acquired Southern Technical College; Summer Street Capital acquired Midwest Technical Institute and Pivotal Group acquired Pan Am Education, a provider of English language courses. Strategic buyers were less active in October, although in one large deal Pearson acquired Embanet for USD 650m. Pearson owns the Financial Times Group, the parent company of mergermarket. The same month, John Wiley & Son acquired, a privately held Chicago-based higher education and online learning services company, for USD 220m.

The private equity momentum carried into November with Riverside Company announcing two deals: it acquired Learning Seat, a Melbourne, Australia-based developer and provider of e-learning courses and added on to its OnCourse Learning platform with San Diego, California-based Digital University, an online bank and credit union regulatory compliance training business. Riverside has made 33 education investments in its history, according to a press release.

Jim Bland of Chicago PE firm HCP & Co., which acquired Career Training Academy in February of this year, said “it’s a great time to be a buyer. Valuations are really low.” Now that the election is over, buyers, at least ones with experience in the postsecondary sector, will be more likely to take the plunge. “The cloud is lifted to some degree. We know who the administration is and who is in control of the Senate. It allows you to evaluate and review deals in somewhat of a clear light,” Bland said.

Education investment banker Mark Jopling cautioned that two or three investments in postsecondary schools do not represent a reopening of that market. In fact, he maintains that the election will have a depressive effect on the sector, calling this “a common assumption throughout the industry.” He said the Obama administration has been “hostile” to the sector.

All of the sources noted that schools are still bracing themselves for potential reauthorization of the Higher Education Act and a US Dept. of Education decision on rules for gainful employment. Under the current regulations, career training programs won’t continue to qualify for federal student aid unless they meet one of three metrics in at least three out of four consecutive years regarding student loan repayment rates and a student’s ratio of debt to annual earnings or discretionary earnings.

The first analyst said there’s a possibility the scope of gainful employment may be expanded to nonprofit schools and that Republicans may be likely to approve such a measure because it would be seen as leveling the playing field. The analyst said nonprofit schools have better student outcomes than for-profit schools so he did not think they would have trouble complying with the rules.

Weak performance is also weighing on postsecondary M&A. Many schools’ new starts have still not bottomed out, which makes it hard to predict the next year or two’s performance, Jopling noted. “If you don’t have that, it will be a distressed sale or special situation. There are some schools coming to market that are doing quite well. They say ‘we’re going to try.’” But Jopling said “I don’t think strategics have much appetite” to make acquisitions when their shares are trading at 3 to 4 times EBITDA.

Jopling did say, however, that PE-owned schools that don’t want to sell at low multiples could start buying instead.

The first analyst said he sees PE interest in schools that are not regulated under Title IV as well as MOOCs (massive open online courses) and providers of online education consulting to universities. In fact, valuations are getting “kind of frothy” for non-regulated education companies, reaching the mid-to high single digits of EBITDA. By contrast, public education company stocks sold off sharply after the reelection of President Obama and are trading in the low single digit multiples of EBITDA. The analyst said “all public companies are takeout targets.” He pointed to Universal Technical Institute (NYSE:UTI), Lincoln Educational Services (NASDAQ: LINC) and even Apollo Group (NASDAQ: APOL). “Revenues are shrinking. There are advantages to taking them private.”

The first analyst added that even for the public companies that are outperforming, such as Grand Canyon Education (NASDAQ: LOPE) and American Public Education (NASDAQ:APEI), “maybe some value could be extracted if they go private.”

But the analyst cautioned that regulated, accredited schools are far stricter about changes of control than non-regulated schools. The other problem is that because revenues are decreasing, banks are hesitant to make loans. Bland also noted that loans are hard to come by for larger deals, but he said if valuations are attractive enough, private equity sponsors don’t mind putting in extra equity.

A second industry analyst said it’s possible that the flurry of PE deals could be pointing to a recovery in M&A activity, although the deals are starting out pretty small.

Jerry Herman, managing director of equity research at Stifel Nicolaus, said there has been some uptick in M&A and it is not just PE-related. He pointed to interest in technology-centric and K-12 focused companies.

Buyers are not necessarily running away from postsecondary education but the sector faces more regulation than others. “There is interest in M&A in the postsecondary market, and we expect that will translate into action,” Herman said.

Drivers in technology and K-12 are US Secretary of Education Arne Duncan’s desire to see a greater use of technology in the classroom, the growth of individualized/adaptive learning, and the use of more technology by both teachers and students, Herman noted. Also the software as a service (SAAS) model is good for organizations that are looking to lower costs, he said. The technology and education market remains fragmented and consolidation often results from smaller companies looking to take advantage of the distribution networks of larger partners, he added.


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