Private Equity Targets Private Education (EDMC, CECO, COCO, APOL)

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Includes: APOL, CECO, COCO, EDMC
by: The Stalwart

The Stalwart submits: Well just as for-profit educators looked like they wouldn't make the comeback many contrarians such as this author expected, it seems private equity has come in to save the day at least for the time being. Then again being bought out isn't yet a comeback now is it. Nevertheless, turns out Providence Equity Partners & Goldman Sachs have announced that they will buy-out Education Management (NASDAQ:EDMC) for US$3.4bn:

The transaction will be financed through a combination of equity contributed by the private equity sponsors and debt financing provided by Credit Suisse, Goldman Sachs, Merrill Lynch and Bank of America.

"This transaction will further enhance the prospects of our education systems," said John R. McKernan Jr., Education Management's chief executive and vice chairman. "Our new financial partners will provide the resources necessary to realize our full potential and contribute significantly to helping us attain our long-term strategic vision."

We must admit its interesting that EDMC was in fact bought out at the top end of its 5-year trading range (chart below), so even those who bought the shares at their previous 52-week high in 2004 still got out roughly even. That's not too bad... and the PE valuation on EDMC? Well according to Yahoo its at 27.5x (and our back of the palm gives 27x).

Now while many other private educators, goliath Apollo included, trade for far less than this multiple these days, we'd best be careful to first evaluate the quality and reputation of the different educators before jumping to any valuation conclusions. Perhaps EDMC is a good deal at 27.5x even though previous high-flyer Apollo now trades (post profit warning) at under 20x. With out limited knowledge, we'd probably steer clear, but are just keeping an open mind.

Still, now that the clouds have parted for EDMC, we were fed the classic for-profit educators' sunshine pitch:

Paul Salem, of private investment firm Providence Equity Partners, said, "There is significant unmet demand for higher education in this country and abroad, and EDMC is exceptionally well positioned to continue to address this compelling market opportunity by further increasing the number of academic programs, campus locations and online offerings."

Affordable education for the masses, our dream of democratizing access to knowledge... and clear skies ahead according to the Providence Equity Partners, but let's remind ourselves that they were the ones who bought just the company so are probably a bit biased.

Nevertheless we here at the Stalwart do admit to believing this for-profit motto as well, though we've had our thesis tested quite frequently over the last year or so and are no longer quite so adamant. One issue which worries us is that many state schools are pretty cheap these days, and if you look at the prices for a company such as Apollo, it isn't all that cheap in comparison. In terms of for-profit education quality, it also doesn't comfort us that a website called University of Phoenix Sucks exists (against the flagship U. of Apollo) while www.harvardsucks.com is as yet unclaimed. On a more serious note, if you look at online university reviews, the few for-profit educators we found didn't rate too highly. (receiving sort of C/C- quality grades from students)

Then again perhaps univerisities in general aren't worth all they are cracked up to be.

And of course, other private educators rallied on the news, with an obvious trend that those with the weaker franchises rallied hardest. Corinthian Colleges (NASDAQ:COCO) up 7% as of this writing for example despite their inability to grow revenue recently. Hopefully they'll back up the rally with an earnings recovery from this disappointing performance.

If anyone has actually gone to a for-profit university and is keen to comment, we welcome your perspective.


EDMC 5-yr Chart

[Disclosure: the author owns shares of both Career Education (NASDAQ:CECO) and Corinthian Colleges]

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