Career Education - How A 'Small' Sale Changes Everything

| About: Career Education (CECO)

Shares of Career Education (NASDAQ:CECO) jumped up on Friday, ending the last day of the trading week with gains of over 57%. The reason is simple:

The company announced the sale of its European education assets for a very steep price. The unit which makes up about a tenth of total revenues fetched a sale price, greater than the market capitalization of Career Education on Thursday.

Given the cash infusion and the continued restructuring progress, shares have become attractive for speculative long term buyers.

The Deal

Career Education announced that it has reached a definitive agreement to sell its European education properties to private equity firm Apax Partners.

Career Education expects to receive $305 million for the activities. Including intra-company distributions and closing adjustments, Career Education expects to receive net payments of $276.5 million.

The to be sold activities of Career Education is comprised out of Paris-based INSEEC and the International University of Monaco, offering business, health, advertising and technology studies.

CEO Scott Seffey commented on the sale, "Redeploying capital from Europe to the United States is the right move for Career Education. It will help us best serve the vast majority of our students, who are U.S.-based, and return the best value for our investors. The cash from the transaction will improve our options for accelerating future growth."

The activities reported revenues of $128.6 million in 2012, valuing the business at 2.4 times annual revenues.

The deal is expected to close by the end of this year and is subject to normal provisions, including French anti-trust approval.


Career Education ended its second quarter with $241.8 million in cash, equivalents and short term investments. The company does not have any debt outstanding, for a solid net cash position. Adding net cash proceeds of $276.5 million from the announced deal, and the company will operate with a net cash position of around $518 million.

Revenues for the first six months of the year came in at $635.1 million, down 20.2% on the year before. Net losses narrowed from $48.2 million to $46.6 million thanks to higher benefits from income taxes.

Factoring in Friday's 57% jump, with shares trading at $6 per share, the market values Career Education at $400 million. Note that the company already holds $7.75 per share in cash alone. The $400 million valuation values Career Education at merely 0.3 times annual revenues, while the company is reporting net losses at the moment.

Given the dismal operating performance, Career Education does not pay a dividend at the moment.

Some Historical Perspective

Investors in Career Education have seen terrible long term returns. Shares peaked around $70 in 2004 as shares have steadily fallen to lows of $2 in April of this year. On the back of the deal shares have risen from $2.50 at the start of the month towards $6 per share at the moment.

Between 2009 and 2012, Career Education has seen its revenues fall by a cumulative 17% to $1.49 billion. After reporting profits in recent years, Career Education posted a $143 million loss in 2012.

Investment Thesis

The sale, or better said, the sale price of the European assets has been a huge positive surprise to the entire investment community. Analysts at Wells Fargo (NYSE:WFC) estimated that the unit could fetch some $106 to $127 million. The $305 million price tag, was bigger than Career Education's market capitalization on Thursday, while it sold an underperforming asset generating just 9% of total firmwide revenues.

Revenues for the first half of the year came in at $635 million, down 20% on the year before. At this pace annual revenues of around $1.2 billion seem reasonable, while Career education is now shedding an asset generating $129 million in revenues in 2012. After the deal, a business with $1.1 billion in annual revenues remains. The problem is that the business is losing money, lots of money.

Pre-tax losses in the first half of 2013 totaled $88 million as the student population dropped by a quarter to 57,600, while enrollments fell by a similar percentage. The good thing is that nearly half of Career's activities, being the University School unit is generating operating earnings. This business reported operating earnings of about $37 million in the first half of this year.

That being said, the firm made another step in divesting underperforming assets. On a pro-forma basis, the business is generating $1.1 billion in revenues at the moment, while reporting steep operating losses of at least $150 million per annum. The good news is that the firm operates with some $500 million in cash and has no debt outstanding, for a solid cash position. This should give Career Education enough time and resources to finance its restructuring assets.

These positive developments warrant the great run-up over the past month, as it gives the company time and cash to restructure. The firm has solid cash balances, which will undoubtedly see declines during the restructuring phase. Yet these resources combined with the solidly profitable US University School activities, shares might be interesting again in the long run.

Shares are a speculative long term investment at these levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.