Yes, that's right! Put the company up for sale! It is clear that the public market refuses to award our company a satisfactory valuation. Therefore, it is time to explore the private market value of the company for the sake of all shareholders. The tables that follow outline the valuation discrepancy between BPI, and seven other publicly traded education companies. As a preview, this valuation discrepancy most likely boils down to the unfortunate issue of Warburg Pincus having a huge stake that needs to get sold. Therefore, the best alternative for all shareholders, including Warburg, is to sell the whole company.
The following table shows the companies chosen for this analysis. It includes a variety of education companies with different market capitalizations and varied addressable market segments (sorted by enterprise value).
One can see that Bridgepoint is one of the smaller companies in the sample size, making it an attractive acquisition candidate.
The next table shows the relative size of the companies based on the number of students enrolled. It also shows the growth in student enrollments (sorting by ending 2011 enrollment growth).
One can easily see that nearly everyone in the industry is shrinking, with the exception of American Public Education Inc. (NASDAQ:APEI) and Bridgepoint Education. All of the harsh language coming out of Washington DC and potential new regulation has limited new enrollments and reduced growth opportunities. Somehow, BPI and APEI have figured out a way to keep growth up for the time being. Normally this would be noticed by the market and APEI and BPI would be granted higher relative valuations.
The following table includes revenue growth figures for the company, as well as expected revenue growth (per Wall St. consensus via Bloomberg) for 2012. (Note, all companies are adjusted to include the latest 12 months of operating results ending closest to 12/31/2011 and 12/31/2012)
Again, according to Wall St. consensus, BPI and APEI are the only companies that are supposed to grow in 2012.
Logic would dictate that BPI and APEI would probably be afforded higher multiples than everyone else in the industry, right? The next and final table shows that this is not the case:
WRONG! While APEI has a healthy multiple, BPI lags the pack, and meaningfully.
What does this mean? It could mean a handful of things, but clearly the public equity markets refuse to see Bridgepoint as a company worthy of a valuation garnered by its peers. It could mean that:
1) The market thinks BPI's profits are not sustainable and thus they deserve a lower multiple.
2) The market thinks management will not skillfully navigate any upcoming challenges and will squander the company's resources. Alternatively, the market does not believe management's recent guidance and instead thinks the company will shrink in 2012. (Management repeatedly low-balls guidance so this is unlikely)
3) The market thinks that there is a near-term event that will derail the company.
4) The market won't touch the stock until 66.4% holder Warburg Pincus has disposed of its stake.
1, 2, and 3 all seem like remote possibilities in my opinion. In any case, an event that negatively impacts BPI in a major way will also likely affect other companies in the industry. And, we are looking at valuations relative to others in the industry, so that should already be largely accounted for in this analysis.
So, the valuation discrepancy might largely be due to #4, or the overhang presented by Warburg Pincus's large stake that needs to be sold. Warburg's stake is already altering the capital allocation plans of the company (management doesn't want the float to be too small as noted at the William Blair - Global Services Growth Stock Conference on December 7, 2011). Thus, Warburg's stake is impacting shareholder returns as buybacks have been halted for the time being. Given this, if the 67% holder wants to sell its shares, what better way to accomplish that then sell the whole company? In fact, it seems like the most fair and reasonable step to take. After all, if Warburg trickles shares out over the next few years, nothing will be solved and the price of the stock will likely continue to languish. So, let's solve this ongoing problem once and for all.
All shareholders would benefit from the likely control premium received from a potential buyer. At just 8X EV/EBIT, where many peers already trade (and APEI already trades above) the company would fetch $46.60 per share, or 92% higher than today's price. As one of the only growth vehicles in the education space, Bridgepoint would be a very attractive (and attainable) asset to many players in the industry. Alternatively, a private equity fund (one of Warburg's peers) could also pay a reasonable multiple of EBITDA, borrow multiple turns in the bond markets, and make a killing (huge IRR on a good-size equity investment) doing endless dividend recaps or taking it public in a few years after the debt has been paid down. Carl Icahn or Bill Ackman, if you are reading this, it sure seems like one juicy opportunity. It's time for management to do the right thing and put BPI up for sale!
Disclosure: I am long BPI.