DEALTALK Private equity circles education; awaits rule clarity

BANGALORE, Dec 1 (Reuters) - The final wording of a key U.S. government regulation in the for-profit education sector could act as the starter's gun for a private equity scramble to pick up even some of the industry's leaders. The hotly-debated 'gainful employment' rule, which could be finalized as early as next month, has caused the most uncertainty as it threatens to limit schools' access to financial aid -- which jumped to almost $150 billion last academic year -- and cut student enrollment, putting a big dent in future revenues. The regulatory uncertainty has kept private equity firms at bay this year despite cheap valuations in an industry that saw stellar growth during the recession, but which has been battered by criticism as it loads students with debt and does little to improve their job prospects. "The uncertainty in the sector has for all intents and purposes shut down the mergers and acquisitions market in the sector in the near term," said John Rogers, principal at California-based private equity firm Gryphon Investors. But once the gainful employment rule is resolved and schools figure out how to live with it, private equity is poised to strike. Deals could fetch high premiums depending on companies' exposure to the new regulations, boosting some stocks that are trading at depressed levels. Private equity is no newcomer to the for-profit education sector, attracted by the huge demand for post-secondary education, particularly at a time when there is a weak jobs market and sluggish economic recovery. "All the fundamentals are there to think that one of the large public equities would go private," said Jay Bartlett, co-head of private equity at advisory firm Parthenon Group. Four years ago, some big names in the for-profit space -- Education Management and Laureate Education -- were taken private in deals worth more than $3 billion apiece. BMO Capital Markets analyst Jeff Silber said it was not just stocks such as Corinthian Colleges, ITT Education and Lincoln Education trading at extremely low valuations that are potential targets. "We have had at least one conversation with private equity investors about every post-secondary name we cover, as well as some we don't," said Silber. Providence Equity Partners, part of the private equity consortium that bought Education Management in 2006, is shopping around, while Sterling Partners is keeping a close eye on the sector, according to Nicolas Pechet, managing director at global advisory firm GIA Group. Market leader Apollo Group could be a potential buyer and chase smaller listed firms, said Sandy Mehta at Value Investment Principals Ltd, which holds a stake in the company. DEPENDENCY Deal valuations would hang on companies' dependency on federal student aid -- those with less exposure would attract buyers' attention, said Bruce Eatroff, partner at private equity firm Halyard Capital. American Public Education, Universal Technical Institute and Grand Canyon have the least regulatory exposure among the dozen or so leading players. Investment banker Todd Parchman said potential acquisition targets would be those colleges offering programs that pay off in terms of employment, and debt-laden companies forced to cut the number of programs they offer. "The higher the quality of the program as measured by the new regulations, the higher the multiples," said Parchman. Valuations in the private space tend to run between 8 and 12 times EBITDA, according to Parthenon's Bartlett. "The underlying fundamentals in the business, margin structure and growth, can warrant high single-digit and low double-digit EBITDA multiples," said Robert Lytle, partner at Parthenon's education practice. "But these valuations are contingent on a positive regulatory outcome," he said. TOUGH FUNDING ENVIRONMENT Bob Puopolo, partner at education-focused Epic Partners, said his firm was waiting for the final gainful employment ruling. "Until that time, we're not pursuing anything aggressively. And my impression is that nobody else is either," he said. Several deals were in the offing during the summer but were delayed or called off due to the growing uncertainty, private equity firms said. There has also been a lull in initial public offerings in the post-secondary sector. BMO Capital Markets' Silber said deal financing was likely to remain tough as lenders would be even more conservative. "It may be difficult to get a deal financed until more clarity is provided on gainful employment," he said, adding the main obstacles were structuring deals and resolving ownership issues, rather than current valuations. (Reporting by A.Ananthalakshmi and Megha Mandavia in BANGALORE, Editing by Ian Geoghegan)

COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

Perfection Learning Announces Acquisition of Digital Textbook Publisher, Kinetic Books

DES MOINES, IA, November 8, 2010 – Perfection Learning, one of the leading publishers of language arts materials for grades 6-12, announced today the closing of an agreement to acquire Seattle-based Kinetic Books, publisher of next-generation digital math and science textbooks for the secondary and higher education markets.

Kinetic Books’ programs include comprehensive digital textbooks in physics, algebra, and geometry designed from the ground up to take maximum advantage of current computer technology. Including such features as virtual labs, interactive activities, electronic whiteboards, self assessment, and step-by-step problem solving support, Kinetic Books’ programs allow teachers and students to realize the promise of a digital learning environment.

Kinetic Books physics texts are currently in use in hundreds of schools, universities, and 2-year colleges throughout the US and in over a dozen countries. Recently released math programs cover pre-algebra, Algebra 1, and Algebra 2. A geometry program will be available in 2011. Teachers are enthusiastic about Kinetic Books, "Overall, this curriculum increases the learning potential that each student has on their own,” said one teacher. “Several learning styles are addressed at once. Students with poor reading comprehension are still able to learn because they have the interactive videos and practice problems to work with. Audio learners are able to listen to the recordings. About the only thing this book doesn't do is make kids get up and dance...though we've been close at times."

“We are very excited to add Kinetic Books to our company,” said Steve Keay, Perfection Learning’s President and CEO. “Since 1926, we’ve focused on providing innovative, cost-effective solutions to classrooms. We believe that Kinetic Books’ programs provide the platform teachers need to fully incorporate digital learning tools in the classroom. Their physics and math texts are easy-to-use, comprehensive, and flexible. By creating interactive modules that follow standard textbook sequencing, Kinetic Books addresses the biggest challenge for teachers today – how to integrate digital materials successfully without having to find and incorporate materials from multiple sources, which is time consuming and often cost-prohibitive. With Kinetic Books, digital delivery is designed into the program from beginning to end.”

“We’re proud of our successes so far and believe joining the Perfection family is the way to both improve our products and bring them to more students and instructors,” said Bruce Jacobsen, founder of Kinetic Books.  “Perfection has a proud tradition of providing excellent products and we believe we can benefit from their expertise and successes.”

Baltimore-based Parchman Vaughan & Company advised Kinetic Books on the transaction.

Analysis Tough love to trigger U.S. education shakeout

BANGALORE Fri Sep 17, 2010 12:07pm EDT

BANGALORE (Reuters) - The $118 billion U.S. for-profit education industry faces a shake-up as authorities, fed up with lax governance and a heavy graduate debt burden, plan tough rules that will likely drive some small firms to the wall.

Those institutions with relatively high ex-student loan repayment rates, such as American Public Education (APEI.O), Bridgepoint Education (BPI.N), Grand Canyon (LOPE.O) and Universal Technical Institute (UTI.N), should emerge as winners.

But, as firms come under pressure to take in fewer students and cut back the courses they offer, those such as Apollo Group (APOL.O), Capella Education (CPLA.O), Career Education (CECO.O), DeVry (DV.N) and Education Management (EDMC.O) are likely to have to spend to grow.

"The market is still there. Demand is still growing and will go to a smaller number of schools," said Brandon Dobell, analyst at William Blair.

Demand for education is growing as people seek the skills or re-training needed to equip them for battle in a weak jobs market, and a widening supply-demand gap may also put pressure on President Barack Obama's ambitious goal of ensuring every American has at least one year of college education.

Dobell predicts stricter rules -- a final draft of these is expected by November -- will trigger consolidation across the private sector.

"There will be a smaller number of schools, and there will be programs and students the sector does not address anymore," he said.

The failures will be among the hundreds of smaller, unlisted colleges that cater to 500-1,000 students, analysts say.

The United States had 2,944 private for-profit institutions in the 2009-10 academic year, according to the National Center for Education Statistics. Fewer than 15 are publicly traded.

The changing dynamics of a sector that fared relatively well in the financial crisis -- but which has virtually halved since April .15GSPEDUS -- are a result of the government's get-tough approach on an industry that was turning out students who were poorly prepared for work and struggled to repay big loans.

For-profit schools enroll around 12 percent of all U.S. post- secondary students, but receive 23 percent of all federal student aid.

Enrollment at for-profit colleges topped 3.2 million students in 2008-09, a fifth higher than a year earlier, and as the rest of the economy was smarting from the post-crisis downturn.

Apollo, which runs the largest U.S. for-profit college, had about 476,500 students as of its latest quarter.

The government is expected to pay out $145 billion in aid to post-secondary students this year, according to Department of Education data.

To get more bang for the federal buck, the government insists on so-called gainful employment -- where schools must show they prepare students for the workplace before they can receive federal grants and loans.

TOO BIG TO FAIL?

The larger for-profit institutions, analysts say, are too big to go under, given their enrollment numbers and flexible program offerings.

Life will be tougher for those who fall near or below the government's planned cut-off levels. They are the ones that will have to fund acquisitions to ensure future growth.

"Their earnings will be significantly lower than today's projections, though I think they will survive," said Sterne, Agee & Leach analyst Arvind Bhatia.

To be eligible for federal aid -- which accounts for the lion's share of for-profit schools' revenue -- colleges must ensure 45 percent of former students are paying down debt. If that rate falls below 35 percent, schools stand to lose aid.

Corinthian Colleges (COCO.O), among those where ex-student debt repayments are flashing the warning signals, is voluntarily cutting down the number of new students it is taking in.

"Corinthian could certainly be in trouble given how low their repayment rates are," said Bhatia. "Its business is deteriorating at a rapid pace."

Analysts said Corinthian should slim down, and may become a prime target for takeover by a bigger rival.

Corinthian spokesman Kent Jenkins said the company does not comment on speculation.

As colleges look to streamline the programs they can offer -- those most at risk are the slightly less academic short-term courses such as criminal justice and cooking -- they may look to acquisitions to drive enrollment and revenue.

DeVry CEO Daniel Hamburger has warned that the government proposals could mean the loss of 300,000 new students each year.

"The bigger schools ... will have to buy their way into new program areas because growth restrictions on new programs may be difficult to work with," said Dobell, predicting consolidation will move apace late next year and into 2012.

Some struggling smaller colleges may seek buyers to avoid going bust, and some smaller listed firms may go private.

Investment banker Todd Parchman, a partner at Parchman, Vaughan & Co, said the pace of deals is likely to be slow until the new regulations are clearer.

"It's a little bit like the banking industry after the (financial crisis) crash. You want to see how these people are going to look after the crash is gone," he said.

The last big deal in the industry was four years ago, when private equity firms paid $3.4 billion for Education Management. The company, 38 percent-held by Goldman Sachs, went public in 2009 and has a current market value of $1.5 billion. (Reporting by A.Ananthalakshmi and Megha Mandavia in Bangalore, Editing by Ian Geoghegan)

Parchman, Vaughan & Company, L.L.C