Private Equity Firms' Foray Into For-Profit Education LBOs

Marketwatch reports that the board of Laureate Education (LAUR), a for-profit provider of higher education, has agreed to a $3.1 billion buyout led by founder and Chief Executive Douglas L. Becker and backed by a private equity consortium including Kohlberg Kravis Roberts & Co., Citigroup Private Equity and hedge fund S.A.C. Capital Management LLC.

Under the deal, announced Sunday, Laureate shareholders would receive $60.50 a share in cash, an 11% premium to the closing price of the stock Friday. Including assumed debt, the total value of the deal is $3.8 billion. The board will actively seek a higher, competing bid under a “go-shop” clause for the next 45 days. While such arrangements don’t typically produce competing bids, the management team’s agreement with the financing group isn’t exclusive, meaning it could, in theory, sign up with a richer offer.

The deal extends a foray by private equity firms into for-profit education following a transaction last March in which Providence Equity Partners and Goldman Sachs Capital Partners paid about $3.4 billion to acquire Education Management.

There are two companies whose Boards should start thinking about a private equity buy-out: Apollo Group Inc. (APOL) and Educate (EEEE) have both seen tremendous erosion in shareholder value. Apollo (52wk Range: 33.33 - 59.79), trading at about $42, $7.42 Billion Market Cap, and Educate (52wk Range: 5.06 - 12.23), trading at about $7.8 now, $335 Million Market cap, each have a branded asset that is highly under-leveraged.

Apollo’s University of Phoenix is still largely a brick and mortar operation, and doesn’t do justice to the potential of online education, especially to the wide open international markets - India and China. It appears to me that Apollo’s management is clueless on both scores: Online and International, the two being the levers for the next phase of growth.

Educate owns the widely known Sylvan tutoring center franchise. The Tutoring industry, however, is also moving online, as evidenced by Sequoia’s investment in Tutorvista, which uses tutors from India. This is a multi-billion dollar opportunity, but once again, it seems to me that the company management is clueless about Online and India.

If I were an LBO firm looking for my next buy-out prospect in for profit education, I would pick these two up, and apply the same levers to each: Online and India. Both stocks have a lot of lift to pick up, but not in the hands of their current management.