Grand Canyon U. Contemplates a Nonprofit Future

October 30, 2014

The for-profit Grand Canyon University is considering reverting back to nonprofit status, a move its president said could spare it from the “stigma” surrounding the for-profit higher-education industry and allow it to tap into the rich vein of philanthropy that would support its Christian-focused mission.

“There are significant people in the Christian community who would like to get behind this,” Brian E. Mueller told reporters in a conference call on Wednesday, just minutes after the publicly traded company that owns the university unveiled its plan to investors.

The proposed move raises some major questions, not the least of which is how a university with a current stock-market value of about $2-billion will find enough money to satisfy those investors with a buyout deal without leaving behind an institution burdened by debt.

While the company was close-mouthed with details, experts familiar with the sector said a conversion of this size would very likely involve another nonprofit entity, perhaps a religious organization, that has either deep pockets or the ability to borrow commercially or on the public-finance markets. Other for-profit colleges, including Keiser University, have gone private before, but they were smaller and privately held.

Coming on the heels of other recent events—the collapse of Corinthian Colleges Inc., the Education Management Corporation’s planned delisting from the Nasdaq stock exchange, and the federal government’s announcement on Thursday of a new “gainful employment” regulation—some observers said it could also be a further sign of a shifting tide in the for-profit higher-education industry.

“Huge education corporations as attractive growth stocks—that seems to have run its course,” said Kevin Kinser, an associate professor at the State University of New York at Albany, who studies proprietary education. “You’re looking at a year where it looks like the final chapter was written.”

Mr. Mueller said for-profit status “hasn’t really hurt our enrollment.” But as Grand Canyon increasingly competes for students with nonprofit colleges in California and state institutions in its own back yard, notably Arizona State University, that “negative stigma” becomes a bigger issue.

Many of those nonprofit institutions now pointedly highlight that fact in their marketing. “We want to be able to compete successfully against them,” said Mr. Mueller, who ran the University of Phoenix Online before joining Grand Canyon, in 2008. He also noted that when Grand Canyon moved its athletics programs to Division I, the president of Arizona State, Michael M. Crow, began leading a “somewhat successful” boycott against Grand Canyon with his fellow Pac-12 universities.

Support From Education Dept.

Mr. Mueller said officials at the U.S. Department of Education are “fully supporting” the conversion, although they have noted that colleges will have to resolve regulatory issues surrounding federal student aid that come into play when they take on substantial debt.

Founded in 1949, Grand Canyon was nonprofit for most of its life. In the mid 2000s, when the university fell into debt and nearly closed, it came under the control of investors. The transition from nonprofit to for-profit status was marked by a rocky start, when Grand Canyon fired 17 faculty members, five with tenure. The investors later helped orchestrate the financial transaction that in 2008 brought its parent company, Grand Canyon Education, through an initial public offering.

Over the past four years, Mr. Mueller said, the company has invested more than $400-million in expanding the campus, building new classrooms, residence halls, and laboratories. He said the conversion to nonprofit status would not alter the university’s plans to expand its campus enrollment to 25,000 or affect its goal of increasing its online enrollment by 6 percent a year.

As a for-profit, Grand Canyon has achieved an operating profit margin of about 26 percent on annual revenues of about $640-million. As a nonprofit, Mr. Mueller said, the company would avoid the expense of about $85-million in now pays in taxes. And it could take advantage of the generosity of donors who, he said, “share our value system.”

There are donors in the Christian tradition who “are looking to make an investment that will live on,” said Mr. Mueller, and for many of them a Grand Canyon University organized as a private, nonprofit university represents that vision.

Grand Canyon, which operates an 11,000-student campus in Phoenix and an online operation of more than 55,000, has avoided the investigations and criticism that has touched nearly every other publicly traded higher-education company. And unlike most of them, its enrollment has increased in recent years, not decreased—all the more reason the proposed move left some observers scratching their heads.

“It’s weird,” said Trace Urdan, an analyst at Wells Fargo Securities. “He’s operating in circles where his for-profit status is really grating on him,” said Mr. Urdan. “I think Brian wants to be the president of a university without an asterisk.”