KUHN CAPITAL Monday, March 19, 2018
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M&A Goes to School

January 8

2004 saw the emergence of an increasingly hot M&A market: for-profit education deals. Is this sector overheated?

First the good news. Long-term fundamentals are strong: who can deny the greater effectiveness of private education solutions in the face of intractable union strangleholds on public education?

Add to this advantage the fact that your revenues are subsidized by your competitor -- the Feds also sponsor TItle VI student loans, tuition lifeblood. And, finally, the industry is growing, enjoys strong margins and is fragmented, perfect fodder for consolidation plays. A good and perhaps overblown example of the market's enthusiasm for these various virtures is Apollo Group (APOL), currently trading at a nosebleed P/E of about 90.

Way back in 2001 New Mountain Capital closed one of the first large deals in the industry by sinking $135 million into Strayer Education. More recently, two other private equity groups joined the fray, New York's JLL Partners, which bought Marco Group for $52 million last November; and Chicago-based Willis Stein, which this month closed on the recap of Education Corporation of America (aka Virginia College) for a rumored $100 million.

Now the downside: since the government has loan money at risk, their regulators occasionally harrass for-profit schools, sometime for good reason, sometimes not. Also, all the investment action has created a bit of a seller's market, with transaction multiples now regularly hitting 7x EBITDA or more.

Our net net? We think the vigorous M&A pace will continue in this sector for good reasons for some time. It's an awfully big playing field, and sadly we see government-run schools continuing their decades-long decline.

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